Startup Funding From These 21 Nations Gets Angel Tax Breather

The union finance ministry has notified a list of 21 countries, which includes the US, the UK, Australia and France, from where non-resident investment in unlisted Indian startups will not attract Angel Tax. 

As per a PTI report, the list excludes investments from countries, including Singapore, the Netherlands and Mauritius.

The development comes as the Central Board of Direct Taxes (CBDT) on Wednesday (May 24) notified classes of investors who are excluded from the Angel Tax provision. Such entities include those registered with SEBI as Category-I FPI, endowment funds, pension funds, and broad-based pooled investment vehicles that are residents of the 21 specified nations. 

The list includes:

1. Australia 
2. Austria
3. Belgium
4. Canada
5. Czech Republic
6. Denmark
7. Finland
8. France
9. Germany
10. Iceland
11. Israel
12. Italy
13. Japan
14. Korea
15. New Zealand
16. Norway
17. Russia
18. Spain
19. Sweden
20. United Kingdom
21. United States

For the uninitiated, Angel Tax is the tax that unlisted startups need to pay on the capital they raise through the issue of shares. This tax is levied at a 30.9% rate on net investments over the fair market value. Angel Tax originated from Section 56(2) (VII B)  of the Income Tax Act introduced in 2012. The aim was to restrict money laundering practices. 

This provision was reintroduced in the Finance Bill 2023, which has resulted in debates ever since and the startup ecosystem and venture capitalists started seeking exemptions for certain overseas investor classes. The DPIIT-recognised startups are, however, exempted from paying the Angel Tax, which was notified earlier.

The latest CBDT notification further clarifying the investment classes exempted under Angel Tax would come into effect on April 1.

Referring to the countries that have been exempted, the chairman of Nangia Andersen India, Rakesh Nangia, said that the government is likely aiming to attract more foreign investment (FDI) from countries with robust regulatory frameworks.

“Surprisingly, the countries, such as Singapore, Ireland, the Netherlands and Mauritius, from where the majority of inbound FDI is channelised into India, do not find a mention in this notification,” Nangia said.

The CBDT is expected to soon come out with valuation guidelines for valuing non-resident investment in unrecognised startups for the purpose of levying income tax.

The Finance Bill 2023 notified applying Angel Tax for investments on top of the startups’ fair market value, irrespective of whether the investor is a resident or non-resident. This raised concerns over the methodology of calculation of fair market value, which differ under the Income Tax Act and the Foreign Exchange Management Act (FEMA).