The Finance Bill 2023 did not make any changes to the proposed angel tax provisions, which are expected to negatively impact the start-up funding environment in the country.
Commenting on the development, Siddarth Pai, Founding Partner 3one4 Capital & Co-Chair, Regulations Affairs Committee of Indian Venture and Alternate Capital Association said, “With the passing of the Finance Bill, 2023, the applicability of angel tax on foreign investors has been cemented. The only two classes of investors whose investments are exempt from angel tax are SEBI-registered CAT I and II AIFs as well as IFSCA-registered CAT I and II AIFs (under the IFSCA FME Regulations, 2022).”
He added that there was confusion about whether this goes live from April 1, 2024 or April 1, 2023. But the memorandum to the Finance Bill 2023 clearly states that it applies from assessment year 2024-25, which is financial year 2023-24 (FY23-24). April 1, 2024 in the Finance Act refers to the Assessment year, not financial year.
However, the start-up ecosystem still holds hope for exemptions to international institutional investors like VC funds, sovereign wealth funds, etc. “The Central government is empowered to do so via notification. The hope is that the notification comes before April 1, 2023, so that ongoing funding rounds aren’t dislocated,”Pai added.
The Finance Minister had proposed in the budget that the extra premium received by an unlisted company in India by the sale of shares to a foreign investor will be recognised as “income from other sources” and will be taxed. As per the rule, any extra premium that the investor pays over the start-up’s fair market value (FMV) will attract a 20 per cent tax.
Experts believe that the start-up ecosystem could see a rather intensified funding crunch if the proposed angel tax provisions are implemented, as it will add uncertainty to the already volatile macro environment.
In a background note, the Finance Ministry said that stakeholder concerns about angel tax implementation will be addressed. The note added that draft rules related to valuation shall be shared with the stakeholders for their inputs in the next month. Exclusions, as already provided to domestic venture capital funds etc, will also be considered for similar overseas entities, according to the background note.