FPIs, pension funds, and SWFs that are registered with Sebi are planned to be exempt from the angel tax. Section 56(2)(viib) of the Internal Revenue Code was revised by the Finance Act of 2023, bringing foreign investments in unlisted, closely held businesses—aside from startups recognised by the DPIIT—under the angel tax net.
The startup and venture capital sector has requested an exemption for specific categories of foreign investors.
The Central Board of Direct Taxes (CBDT) described the proposed modifications to Rule 11UA, or the valuation standards, in a statement. The entities planned to be excluded from the scope of the angel tax were also enumerated.
Excluded from this are the government and its subsidiaries, which includes central banks, sovereign wealth funds (SWFs), and international or multilateral institutions or agencies. These include organisations that are under government control or where the government owns at least 75% of the business.
The proposed exempted list includes entities registered with Sebi as Category I foreign portfolio investors (FPIs), banks, regulated entities engaged in the insurance business, endowment funds, and pension funds.
Additionally included on the list are broad-based pooled investment vehicles and funds that do not qualify as hedge funds but have more than 50 participants in total. The Department for Promotion of Industry and Internal Trade (DPIIT) will not impose an angel tax on investments made in startups that it has approved.
In order to assess foreign investors’ investments in unlisted businesses, the CBDT has also proposed the introduction of five new valuation guidelines. Concerns have been voiced following revisions to the Finance Act regarding the methods used to determine fair market value under two different statutes.
According to FEMA regulations, a capital instrument issued by an Indian firm cannot be priced below the fair market value determined by the regulations.
According to the income tax regulations, a tax would be assessed on any additional amount received over and above fair market value (as determined by the income tax laws) when issuing shares to a non-resident.
“I welcome these proposed changes by the CBDT,” said Mayank Singh, co-founder of Campus 365. We can draw in international investment and maintain growth by expanding the valuation techniques to include five additional possibilities, which gives resident and non-resident investors more flexibility. The capability to take into account currency changes, bidding procedures, and economic data is a crucial step in managing the unpredictability in the value of unquoted equity shares. In these volatile market circumstances, a safe harbour of 10% value variation is a sensible step.
He continued by saying that the proposed exclusions for specific non-resident investors, such as sovereign wealth funds and regulated companies, are a constructive step that acknowledges the integrity of these institutions and should result in more stable funding. The news statement is a well-appreciated action by the CBDT, according to Saurrav Sood, practise leader (international tax and transfer pricing) at SW India. Since such an amendment will have broad implications for the start-up community, it demonstrates that the government is open to receiving input from the public before making a decision. The central government’s
