The Income Tax Department has ptut forward a proposal to exempt certain investor classes from the purview of angel tax. This move comes after the Finance Act of 2023 amended Section 56(2)(viib) of the Income Tax Act, which had brought overseas investments in unlisted closely held companies under the angel tax net, except for startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
The startup and venture capital industry has been advocating for exemptions for specific overseas investor categories. In response, the Central Board of Direct Taxes (CBDT) released a statement outlining the proposed changes in Rule 11UA, which pertains to valuation rules. The CBDT also provided a list of entities that are expected to be exempted from the angel tax.
Under the proposal, the following entities will be excluded from the ambit of angel tax: government and government-related investors like central banks, Sovereign Wealth Funds (SWFs), international or multilateral organizations or agencies, and entities where the government owns 75% or more of the ownership.
Additionally, banks or regulated entities involved in the insurance business, entities registered with the Securities and Exchange Board of India (SEBI) as Category I foreign portfolio investors (FPIs), endowment funds, and pension funds will also be exempted. Broad-based pooled investment vehicles or funds with more than 50 investors, which are not hedge funds, will also be included in the list of exempted entities. Investments in startups recognized by the DPIIT will not attract angel tax.
Industry experts have welcomed these proposed changes. Mayank Singh, co-founder of Campus 365, expressed his approval, stating that the increased valuation methods and flexibility provided by the CBDT will help attract global investment and sustain growth. Singh also praised the provision to account for forex fluctuations, bidding processes, and economic indicators, which addresses the unpredictability of the value of unquoted equity shares.
Singh further emphasized that the proposed exclusions for certain non-resident investors, including sovereign wealth funds and regulated entities, recognize the integrity of these organizations and should result in increased funding stability.
The proposed changes by the Income Tax Department are expected to provide relief to investors and encourage foreign investment in Indian startups, fostering innovation and economic growth in the country.
