The income tax department has proposed to exempt Sebi-registered FPIs, pension funds and SWFs from the purview of angel tax. The Finance Act, 2023, had amended Section 56(2)(viib) of the I-T Act, thereby bringing overseas investment in unlisted closely held companies, except DPIIT-recognised startups, under the angel tax net.
The startup and venture capital industry has sought exemption for certain overseas investor classes.
In a statement, the Central Board of Direct Taxes (CBDT) outlined the proposed changes in Rule 11UA or valuation rules. It also listed out entities proposed to be exempted from the angel tax ambit.
The entities excluded are the government and government-related investors such as central banks, Sovereign Wealth Funds (SWFs), international or multilateral organisations or agencies. These include 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 (FPIs), endowment fund and pension fund are also in the proposed exempted list.
Broad-based pooled investment vehicles or funds where the number of investors in such vehicle or fund is more than 50 and such fund is not a hedge fund are also part of the list. Investments in startups which are recognised by the Department for Promotion of Industry and internal trade (DPIIT) will not attract angel tax.
The CBDT has also proposed to introduce five new valuation rules to value investment by foreign investors in unlisted startups. Post the changes in the Finance Act, concerns have been raised over the methodology of calculation of fair market value under two different laws.
FEMA regulations mandate that issue of a capital instrument by an Indian company shall not happen at any value less than fair market value computed under it.
Under the I-T law, tax would be levied on any excess price recovered over and above fair market value (calculated as per the income tax laws) on issuing shares to a non-resident.
Mayank Singh, co-founder of Campus 365, said, “I welcome these proposed changes by the CBDT. Increasing the valuation methods to include five more options provides enhanced flexibility to both resident and non-resident investors, helping us to attract global investment and sustain growth. The provision to account for forex fluctuations, bidding processes, and economic indicators is a significant step towards managing the unpredictability in the value of unquoted equity shares. A safe harbour of 10 per cent variation in value is a considerate move in these dynamic market conditions.”
He added that the exclusions proposed for certain non-resident investors, including sovereign wealth funds and regulated entities, is a positive move that recognises the integrity of these organizations and should bring increased funding stability.
Saurrav Sood, practice leader (international tax and transfer pricing) at SW India, “The press release is a welcome move from the CBDT. It shows that the government is open to receive inputs from the public before they finalise since such an amendment will have wide ramifications for the start-up community. The introduction of five new methods of valuation along with the power to exclude notified entities by the central government will give relief to the non-resident investor.”
He added that the initial fear of ramification still exists as this notification does not create exceptions but provides an elaboration, but we are hoping that with the inputs from various stakeholders, the government may create exception for certain pools of investors through it.
(With PTI Inputs)
Comments
0 comment