No angel tax on pvt investment from 21 countries in Indian startups

The finance ministry has notified that non-resident investments into private Indian startups from 21 countries, including advanced economies like the US, the UK, Germany, and France, will not attract angel tax. Key countries like Singapore, the Netherlands, and Mauritius, however, have been kept out of the list even though many were one of the biggest contributors of foreign direct investment (FDI) to India in the recent past.

The Central Board of Direct Taxes (CBDT) has notified classes of investors, which will not come under the provisions of the angel tax.

These are entities registered with the Securities and Exchange Board of India (SEBI) as Category-I Foreign Portfolio Investors; endowment funds associated with a university, hospitals, or charities; pension funds created or established under the law of the foreign country or specified territory; and broad-based pooled investment vehicle or fund where the number of investors in such vehicle or fund is more than fifty and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.

The countries that have been exempted are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Korea, New Zealand, Norway, Russia, Spain, Sweden, the UK, and the US.

Last week, the finance ministry made an amendment to bring the consideration received from non-residents and introduced changes to taxes levied on angel investors in private companies.

The proposed changes include five more valuation methods, available for non-resident investors, in addition to the discounted cash flow and net asset value methods of valuation.

Further, where any consideration is received by a company for the issue of shares, from any non-resident entity notified by the Centre, the price of the equity shares corresponding to such consideration may be taken as the fair market value of the equity shares for resident and non-resident investors.

This is applicable if the consideration from such fair market value does not exceed the aggregate consideration that is received from the notified entity. Also, if the consideration is received by the company from the notified entity in 90 days of the date of issue of shares.

On similar lines, price matching for resident and non-resident investors would be available with reference to investment by Venture Capital Funds or Specified Funds, the guidelines said.

To account for forex fluctuations, bidding processes, and variations in other economic indicators, which may affect the valuation of the unquoted equity shares during multiple rounds of investment, a safe harbor of 10% variation in value is proposed.

Separately, the finance ministry has also increased the limit for tax exemption on leave encashment for non-government salaried employees. The tax exemption -- in respect of the period of earned leave at credit at the time of his retirement, whether on superannuation or otherwise -- was earlier up to a limit of ₹3 lakh only. Now, the Centre has notified the increased limit for tax exemption to ₹25 lakh from April 1, 2023.