Days after the income tax department proposed to exempt Sebi-registered FPIs, pension funds and SWFs from the purview of angel tax, the government has notified 21 countries from where non-resident investment in unlisted Indian startups will not attract angel tax. The countries include the US, UK and France. However, the exemption will not be applicable to investments from countries like Singapore, Netherlands and Mauritius.
In the notification, the other nations from where non-resident investment in unlisted Indian startups will not attract angel tax are — Austria, Canada, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand and Sweden. The CBDT notification comes into effect on April 1.
Angel tax is a commonly used term for tax imposed when shares of an unlisted entity are issued to an investor at a price more than its fair market value.
In the Budget 2023-24, the government brought overseas investment in unlisted closely held companies, except DPIIT-recognised startups, under the angel tax net. Following that, the startup and venture capital industry sought exemption for certain overseas investor classes.
The Central Board of Direct Taxes (CBDT) on May 24 notified classes of investors who would not come under the Angel Tax provision. Excluded entities include those registered with Sebi as Category-I FPI, Endowment Funds, Pension Funds and broad-based pooled investment vehicles, which are residents of 21 specified nations, including the US, UK, Australia, Germany and Spain, as per the notification.
Banks or regulated entities involved in insurance business, and entities registered with Sebi as Category I foreign portfolio investors (FPIs), endowment fund and pension fund are also in the proposed exempted list.
Shruti K P, partner at IndusLaw, said, “Several top FDI source countries for India are conspicuous by their absence, from the list of exempt countries provided. The excluded jurisdictions include countries such as Singapore, Netherlands, Mauritius etc. Primary investments from several India-focused funds located in these jurisdictions may therefore get caught within the rigours of Section 56(2)(viib). The government’s intent seems to be to discourage the use of any tax favourable jurisdictions to invest into India. As a result, there is a likelihood that routing of investment through the excluded jurisdictions will reduce tremendously.”
Under the existing norms, only investments by domestic investors or residents in closely held companies were taxed over and above the fair market value. This was commonly referred to as an angel tax. The Finance Act, 2023, has said that such investments over and above the FMV will be taxed irrespective of whether the investor is a resident or non-resident.
Post the amendments proposed in the Finance Bill, concerns have been raised over the methodology of calculation of fair market value under two different laws.
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