How Angel Tax Exemption In These 21 Countries Will Impact Indian Startups

The Central Board of Direct Taxes (CBDT), under the Finance Ministry, has ruled out investors from 21 selected nations under Angel Tax Exemption for investing in unlisted startups of the Republic of India, through an official notification on 24 May.

The CBDT notification, which will be effective from 1 April 2023, excluded residents of 21 nations from the levy of angel tax viz., the USA, Australia, UK, Spain, France, Germany, Japan, Austria, Sweden, Canada, Norway, Denmark, New Zealand, Russia, Belgium, Italy, Czech Republic, Israel, Korea, Finland, and Iceland.

Along side the exemption of 21 nations, the latter-day press release by CBDT also accompanies the other excluded entities such as those registered with SEBI under FPI Category-I, Pension Funds, Endowment Funds, and broad-based pooled investment vehicles which contains more than or equal to 50 number of funds and vehicles.

Angel Tax Backdrop

Angel Tax was formally introduced in 2012 as an amendment to the Income Tax Act Section 56 (2) (vii b), and defined the tax which was to be levied on privately held companies and domestic angel investors if their subscription of shares were at a higher rate than the fair market value (FMV) of the firm’s share.

The main objective behind the Angel Tax was to keep a check on the money laundering mishappenings, as well as to deter the use and generation of unaccounted money.

As part of the Startup India Scheme, the Angel Tax Exemption was brought into play in 2019 for recognized startups, signifying that the startups which are certified by the angel tax exemption criteria will not have to pay hefty taxes on the angel investment received by them.

The newly formed innovative startups, who were already on a lookout for angel investors in order to fund capital, are greatly supported by this exemption of angel tax in their investment activities that helps them upscale their business.

Whether or not the investor be a resident or a non-resident, if their investments goes over and above the FMV, it would be subjected to tax as per the Finance Act 2023.

This concept was challenged and many of the investors and founders sought relaxation for certain overseas investor classes, owing to the investment climate as well as impediment of growth of startups in the nation.

Angel Tax Exemption – Aftermath

Rakesh Nangia, Chairman of Nangia Andersen India, claims that the explicit list of countries put forward by the Government is an indirect indication of attracting more foreign direct investments (FDI) from countries with a robust regulatory framework into the Indian base.

Nangia further exclaimed that this move to be in alignment with initial intention of the Government of preventing circulation of unaccounted or black money by bringing FDI under the realm of angel tax.

Therefore, the decision seems to serve a logical purpose by exempting funding from regulated entities belonging to nations with effective and strict regulatory framework.

Nonetheless, much to the surprise of the general public, countries which bring most of the FDI into the Indian market, such as Mauritius, Singapore, Netherlands, and Ireland, did not find their mention in the released notification.

The Deals Leader at PwC India, Bhavin Shah also commented on the same note of the missing names of top jurisdictions in the notice, constituting the Singapore, UAE and Mauritius, which closely contribute to more than 50 per cent of the foreign investments in India.

Although, the relaxation would welcome the ease of foreign investments into India, yet the exclusion of the top few countries might keep the startups and private equity and venture capital funds, in which they invest, on their toes with an issue of angel tax.

A major chunk of the investment sources for the fundraising of startups mainly revolves around the three overseas investor classes excluded from the list.

Saurrav Sood, practice leader of international tax and transfer pricing in SW India, noticed the skipping of the jurisdictions to be a deliberate miss, regardless of the major investments offered by them indirectly into Indian startups via specific special purpose vehicles (SPVs).

Sood additionally pointed out that the notice which exempts over 50 investors through the broad-based pooled investment vehicle appears to be misaligned with the provisions of Section 9A, that provides 25 investors with a safe harbor benefit.

Thus it seems that the fundraising by startups might witness a fall in the Government’s bid to plug loopholes from tax havens for investments, following the notification.

A Toothless Tiger Strategy

The startup town also buzzes of another striking issue that merely 2 per cent of the startups registered under the Department for Promotion of Industry and Internal Trade (DPIIT) are actually able to benefit from the angel tax exemption, thanks to the long list of conditions to be fulfilled for a period of seven years.

Another major drawback which the startup industry faces is the time gap between the proposed policy discussions and the actual implementation of the purvey of the plan, which when bridged quickly would bring in more effective policy changes and help the Indian entrepreneurs seize the available opportunity at hand.

A formal notice is yet to be delivered citing the five methods for valuation guidelines by the stakeholders, which saw an ad interim press release last week.

CBDT had released another of an important notice on 19 May detailing the class of investors to be exempted from the angel tax provision.

Proofread & Published By Naveenika Chauhan