The Finance Ministry has issued a notification to inform 21 countries, such as the U.S., U.K., and France, that non-resident investments in unlisted Indian startups will no longer be subject to angel tax. However, the list does not include investments from countries like Singapore, Netherlands, and Mauritius.
NRI Investments in Unlisted Indian Companies No Longer Subject to Angel Tax
For the unaware, previously overseas investments in privately held companies (except DPIIT recognized startups) were included by the government within the scope of angel tax as part of the Budget.
However, in response to the same, the startup and venture capital industry requested exemptions for specific categories of overseas investors.
On May 24, the Central Board of Direct Taxes(CBDT) notified classes of investors who would not come under the Angel Tax provision.
As per the notification, the excluded entities include those registered with SEBI as Category-I FPI, Endowment Funds, Pension Funds and broad-based pooled investment vehicles, which are residents of 21 specified nations, including the US, UK, Australia, Germany and Spain.
A notification has been issued by the Finance Ministry mentioning additional countries, including Austria, Canada, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand, and Sweden.
In the Light of Increasing Foreign Investments
Effective from April 1, this notification was brought into existence with the purpose of explicitly listing these countries is to attract more foreign investments into India, particularly from nations with robust regulatory frameworks, as stated by Rakesh Nangia, Chairman of Nangia Andersen India.
Notably and much to our surprise, countries like Singapore, Ireland, Netherlands, and Mauritius, which are major sources of inbound foreign direct investment (FDI) in India, are not included in this notification.
Since these rules are expected to be released after a consultation process with stakeholders, the stakeholders shall have to wait for a formal notification on valuation guidelines.
The Central Board of Direct Taxes (CBDT) is expected to provide guidelines for valuing non-resident investments in unrecognized startups for the purpose of levying income tax.
Previously, only investments made by domestic investors or residents in closely held companies were taxed if they exceeded the fair market value, commonly known as angel tax. However, as per the Finance Act of 2023, such investments above the fair market value will be taxed regardless of whether the investor is a resident or non-resident. These amendments have raised concerns about the calculation methodology for fair market value under two different laws.
