Investment from angel investors belonging to Singapore, Ireland, the Netherlands and Mauritius will not get exemption under new angel tax mechanism. The Finance Ministry has identified entities from 21 countries which are to get immunity. In another notification, the Ministry reiterated that start-ups recognised by DPIIT will get exemption.

Angel tax (income tax at the rate of 30.6 per cent) is levied when an unlisted company issues 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.

In a notification, dated May 24, the Ministry listed non-resident entities incorporated in particular countries/territories that qualify for immunity. These include government and government-related investors such as central banks, sovereign wealth funds, international or multilateral organisations or agencies including entities controlled by the government with 75 per cent equity or more. Apart from these banks or insurance companies, entities registered with the Securities and Exchange Board of India as Category-I foreign portfolio investors, endowment funds associated with a university, hospitals or charities and pension funds will get exemption.

Another category of exempted entities would be broad-based pooled investment vehicle or fund where the number of investors in such vehicle or fund is more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.

21 specified nations

These entities need to be incorporated in any of 21 specified countries. These countries include 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.

According to Sandeep Jhunjhunwala, Partner with Nangia Andersen LLP, by explicitly mentioning the list of countries, the government aims to attract more foreign investment (FDI) into India from countries that have robust regulatory frameworks. “This move aligns with the government’s initial intention of bringing FDI under the purview of angel tax to prevent the circulation of unaccounted money. Therefore, exempting investments from regulated entities resident in countries with stringent and effective regulatory frameworks serves a logical purpose. Surprisingly, countries such as Singapore, Ireland, the Netherlands and Mauritius from where majority of inbound FDI is channelised into India, do not find a mention in this notification,” he said  

In another notification, the Ministry modified the 2019 notification mechanism to facilitate exemption to DPIIT (Department for Promotion of Industry and Internal Trade)-recognised start-ups from new angel tax provision.

“Conditions for a start-up to claim shelter from applicability of angel tax provisions contained in the DPIIT notification include registration of the start-up with DPIIT and threshold of ₹25 crore on paid-up capital and share premium among other conditions around asset or investment composition of start-up and the same continue as were hitherto applicable,” added Jhunjhunwala.