By - Rajesh Sivaswamy on August 9, 2023
Effective April 1, 2023, any private company that receives funding from a non-resident investor at a premium above the fair market value of its shares as per the Income-tax Act, 1961 (the "Act"), will have to pay tax on the excess amount as income from other sources under section 56(2)(viib) of the Act. This means that from April 1, 2023, any investment made by a non-resident in an unlisted company at a premium over the fair market value of the shares will be taxable as income from other sources in the hands of the company.
Given that the startups in India are witnessing a funding winter, this amendment is likely to have a significant impact on the foreign direct investment (FDI) inflows into India.
While the concept of Angel tax was coined in 2012 as an anti-abuse measure to prevent the use of unaccounted money for funding startups and other companies, the net has now been widened by the Finance Minister in the Budget 2023. The tax has been widely debated by the startup community and investors for being arbitrary, regressive and detrimental to the growth of entrepreneurship and innovation in India.
In response to these concerns, the government has introduced some relaxations and exemptions for angel tax in recent years. For instance, in 2019, the government announced that startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) would be exempt from angel tax, subject to certain conditions. In 2020, the government also increased the turnover limit for startups eligible for angel tax exemption from Rs 25 crore to Rs 100 crore.
The extension of angel tax to non-residents has raised several concerns and questions among foreign investors and Indian companies. Some of the key issues are:
The extension of angel tax to non-residents is a retrograde step that may discourage foreign investment in India and hurt the startup ecosystem. The government should reconsider this proposal and provide clarity and relief to foreign investors and Indian companies. Alternatively, valuation methods under FEMA and the Act should be aligned and exemptions or concessions provided for genuine transactions that promote innovation and entrepreneurship in India. Given the past record of the tax man in India, the government should also provide clarity on how this amendment will affect existing investments and whether there will be any grandfathering or transitional provisions.
Effective April 1, 2023, any private company in India receiving funding from a non-resident investor at a premium above the fair market value of its shares, as per the Income-tax Act, 1961, will have to pay tax on the excess amount as income from other sources under section 56(2)(viib) of the Act.
Angel tax was introduced in 2012 as an anti-abuse measure to prevent the use of unaccounted money for funding startups and companies. The concept has evolved over the years with certain exemptions and relaxations introduced for startups.
This amendment implies that any investment made by a non-resident in an unlisted company at a premium over the fair market value of the shares will be taxable as income from other sources in the hands of the company.
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