Angel Tax: CBDT Likely To Issue Rules Next Week To Provide Clarity

The Central Board of Direct Taxes (CBDT) is reportedly expected to come out with rules about angel tax, which was extended to non-resident investors in the Union Budget 2023-24, next week to provide clarity on the issue.

This tax is payable on capital raised by unlisted companies if the value of the shares issued to investors exceeds their fair market value (FMV). If the share value is less than the FMV, then the difference between the FMV and actual price is taken as ‘income from other sources’ for angel investors, making them liable to pay a tax.

As per the Income Tax Act, a tax of 30.9% is imposed on the share premium issued by unlisted/closely held companies.

Startups have been seeking clarity on the angel tax provision ever since the government extended it to non-resident investors in the Budget. 

The rules on the tax, to be issued by the CBDT, will provide clarity on the criteria of valuation, applicability and exemptions, Moneycontrol reported citing a government official.

The government’s move to extend the scope of angel tax has raised concerns that it would affect the funding raised by Indian startups at a time when the ecosystem is already reeling under the effects of the funding winter.

Earlier, the Department for Promotion of Industry and Internal Trade (DPIIT) reportedly raised the concerns of the startup ecosystem about angel tax with the finance ministry. The DPIIT said that the number of startups in the country have grown rapidly over the past few years, thus leading to a rise in the funding needs of the ecosystem. However, angel tax may lead to startups facing troubles in raising funds.

Meanwhile, the DPIIT has publicly maintained that the Budget provision won’t affect startup funding as the startups registered with the department are exempted from angel tax. Earlier, DPIIT Secretary Anurag Jain said that the extension of angel tax to non-resident investors would level the playing field, which was earlier tilted in favour of foreign investors, and benefit domestic investors.

Last month, the Lok Sabha passed the Finance Bill, 2023, clearing the path for angel tax provision introduced in the Budget.

The developments come at a time when Indian startups have been struggling to raise funds amid the global economic slowdown. The funding raised by Indian startups declined 75% to $3 Bn in the first quarter of 2023 from $12 Bn in the year-ago quarter. The funding crunch has also led to startups resorting to layoffs to cut costs and increase their runway.

As per Inc42’s layoff tracker, Indian startups have laid off over 25,000 employees so far since 2022.