SEBI-registered FPIs and sovereign wealth funds among those exempt from angel tax

The provision stated that when an unlisted company, such as a start-up, receives equity investment from a resident for issue of shares that exceeds the face value of such shares, it will be counted as income for the start-up and be subject to income tax under the head ‘Income from other Sources’ for the relevant financial year. With the latest amendment, the government had proposed to also include foreign investors in the ambit, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable. DPIIT-recognised startups were excluded.

Outlining the proposed changes in Rule 11UA or valuation rules, the statement said where any consideration is received by a company for issue of shares, from any non-resident entity notified by the central government, the price of the equity shares corresponding to such consideration may be taken as the fair market value of the equity shares for resident and non-resident investors. It would be conditional to the extent that the consideration from such FMV does not exceed the aggregate consideration that is received from the notified entity and the consideration has been received by the company from the notified entity within a period of 90 days of the date of issue of shares under valuation.

The tax department listed the excluded entities from angel tax — government and government-related investors such as central banks, sovereign wealth funds, international or multilateral organisations or agencies including entities controlled by the government or where ownership of the government is 75 per cent or more; banks or regulated entities involved in insurance business; and entities registered with SEBI as Category I Foreign Portfolio Investors (FPI), endowment funds and pension funds.

Broad-based pooled investment vehicles or funds where the number of investors is more than 50 and such fund is not a hedge fund too are exempt.

Nangia Andersen LLP M&A Tax Partner Sandeep Jhunjhunwala said the proposal could free up some startups from the rigour of angel tax.