The Income Tax Department on Friday proposed to exempt Sebi-registered FPIs, pension funds and SWFs from the purview of angel tax.
The Finance Act, 2023, had amended Section 56(2)(viib) of the I-T Act, thereby bringing overseas investment in unlisted closely held companies, except DPIIT- recognised startups, under the angel tax net.
Startup and venture capital industry has sought exemption for certain overseas investor classes.
In a statement, the Central Board of Direct Taxes (CBDT) outlined the proposed changes in Rule 11UA or valuation rules.
It also listed out entities proposed to be exempted from the angel tax ambit.
The entities excluded are the government and government-related investors such as central banks, Sovereign Wealth Funds (SWFs), international or multilateral organisations or agencies. These include entities controlled by the government or where ownership of the government is 75 per cent or more.
Banks or regulated entities involved in insurance business, and entities registered with Sebi as Category I Foreign Portfolio Investors (FPIs), Endowment Fund, Pension Fund too are in the proposed exempted list.
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 are also part of the list.
Nangia Andersen LLP M&A Tax Partner Sandeep Jhunjhunwala said the proposal to notify non-resident entities for angel tax immunity and broadening 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 rigour of angel tax.
Investments in startups which are recognised by the Department for Promotion of industry and internal trade (DPIIT) will not attract angel tax.
The CBDT has also proposed to introduce five new valuation rules to value investment by foreign investors in unlisted startups.
Post the changes in the Finance Act, concerns have been raised over the methodology of calculation of fair market value under two different laws.
FEMA regulations mandate that issue of a capital instrument by an Indian company shall not happen at any value less than fair market value computed under it.
Under the I-T law, tax would be levied on any excess price recovered over and above fair market value (calculated as per the income tax laws) on issuing shares to a non-resident.
Jhunjhunwala said as per the CBDT statement, merchant banker valuation seems mandatory now for all valuation methods, though with an extended validity of 90 days prior to share issue date. This was earlier aligned to the date of issue of shares itself and was a requisite only for Discounted Cash flow (DCF) valuation.
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