Draft norms for angel taxation have evoked mixed responses. While some experts feel more valuation methods will help start-ups, others say unrecognised new enterprises with good business prospects will continue to face scrutiny for getting funds from overseas investors.

Angel tax (income tax at the rate of 30.6 per cent) charged is levied when an unlisted company issue shares to an investor at a price that is more than its fair market value. Earlier, it was imposed only on investments made by a resident investor. But Budget 2023-24 proposed to extend angel tax even to non-resident investors from April 1, 2024.

On Friday, the Central Board of Direct Taxes (CBDT) proposed changes to the tax imposed on angel investors in unlisted entities, exempting many categories of foreign investors from such levies.

New valuation methods

In a statement, the board said that investments in Indian unlisted firms by central banks, sovereign wealth funds, and entities controlled by the government with direct or indirect ownership of 75 per cent or more, among others, would be exempt from new tax provision Category-I foreign portfolio investors registered with the Securities and Exchange Board of India (SEBI), endowment and pension funds, banks and insurance companies incorporated in India, and pooled investment vehicles with over 50 investors, will also be exempt from the provisions.

Also read: Know how to check your income tax refund status

The statement talked about five new valuation methods apart from Discounted Cash Flow (DCF) and Net Asset Value (NAV). However, there are currently no details about the proposed methods. The statement says draft rules will be shared for public comments for 10 days, after which these will be notified.

Mixed bag

Though the board says draft rules have been brought in after stakeholder consultation, experts still have questions.

Manish Khanna, Co-Founder of Unlisted Assets, noted that new provisions aim to bring parity between Residents and Non-Residents, however, “it applies to only notified entities. We need to see the applicability once the entities are notified.”

Saurrav Sood, Practice Leader (International Tax & Transfer Pricing) at SW India feels 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. “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 exceptions to certain pool of investors through it,” he said.

Vivek Jalan, Partner with Tax Connect Advisory, said that CBDT has proposed to modify this provision soon to provide that this Angel tax under section 56(2)(viib) of the Act shall not apply to consideration received from any person by start-ups as registered in DPIIT. However, “this is still half the job done as not all new enterprises with good business prospects would be registered as start-ups with DPIIT and hence their funding from NRI investors would continue to be under scrutiny. The CBDT should re-consider this amendment as it would hamper new business in India,” he said.

Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen LLP feels the proposal to introduce a safe harbour of 10 per cent to ringfence valuation of unquoted shares on account of forex fluctuations, bidding processes asnd variations in other economic indicators, etc is a welcome indication. “Proposal to notify non-resident entities for angel tax immunity and broadening up of the list of excluded entity category to cover non-resident entities with 75 per cent Government ownership and broad-based pooled investment vehicles, could also free up few more Indian startups from the rigor of angel tax,” he said.

comment COMMENT NOW