Proposed Changes to Angel Tax and Exclusion of Non-Resident Investors

Posted On - 29 July, 2023 • By - King Stubb & Kasiva

The Finance Act, 2012 added Section 56(2)(viib) to the Income Tax Act of 1961 to discourage unexplained money through the subscribing of shares in closely held enterprises. This clause taxed the excess consideration received from resident investors for the issuance of shares at a premium over fair market value (“FMV”), often known as the “Angel Tax.” The Angel Tax was expanded to non-resident investors by the Finance Act 2023.

Proposed Legislative Changes

On May 19, 2023, the Central Board of Direct Taxes (CBDT) published a press release suggesting legislative revisions to resolve the issues caused by the extension of the Angel Tax to non-resident investors. It is vital to note that the draft legislation’s actual wording has yet to be released for public discussion. The following are the suggested changes:

Alternate Valuation Methods

Companies can now determine the FMV of equity shares using either the Net Asset Value approach or the Discounted Cash Flow technique (“DCF”). In addition to the existing methods, the proposed revisions include the addition of five new valuation methods for non-resident investors.

Deemed FMV for Consideration from Notified Entities

Subject to certain criteria, when a corporation issues shares to notified non-resident entities, the issue price of such shares is regarded to represent the FMV for both resident and non-resident investors.

Price Matching for Venture Capital Funds and Alternative Investment Funds

In the context of investments made by Venture Capital Funds and Alternative Investment Funds, similar price-matching procedures will be available to both resident and non-resident investors.

Relaxation in Valuation Date

The merchant banker’s valuation report for the DCF valuation technique must now be based on the date the company gets the consideration. The proposed amendment allows for a 90-day gap between the actual value date and the specified valuation date.

Safe Harbor Threshold

A safe harbour clause of a 10% variance in value will be included to account for uncontrollable circumstances such as currency fluctuations and bidding processes. Companies will not be subject to Angel Tax if the difference between the real consideration and the FMV is less than this amount.

Exclusion of Non-Resident Investors

The CBDT proposes exempting certain non-resident entities from the Angel Tax. These entities are as follows:

Government and Government-Related Investors

Central banks, sovereign wealth funds, international or multilateral organisations or agencies owned by the government, or entities in which the government owns 75% or more directly or indirectly.

Banks and Insurance Entities

Banks or insurance companies that are subject to the regulations of their nation of establishment, incorporation, or residency.

Entities from Specified Countries or Territories

Entities registered with the Securities and Exchange Board of India as Category-I Foreign Portfolio Investors, endowment funds affiliated with universities, hospitals, or charities, pension funds established under foreign law, and broad-based pooled investment vehicles or funds with more than 50 investors, excluding hedge funds or funds employing complex trading strategies.

No Angel Tax on Non-Resident Investors in Eligible Start-ups

The CBDT also wants to amend the March 5, 2019 notification exempting qualifying start-ups from Angel Tax. The amendment will broaden the exemption to include consideration received from anyone, including non-resident investors.


CBDT’s list of countries from which such non-resident’s investment in Indian enterprises will not Angel Tax excludes countries like Singapore, Mauritius and the Netherlands. This causes concerns, as primarily many funds are invested through the SPV’s of these countries who would not be eligible for tax exemption. Furthermore, there is lack of clarity on how the number of 50 investors would be calculated by the government considering the fact that many investors invest in Indian enterprises through a master fund which might have many feeder funds, blocker funds and Special Purpose Vehicles for its investments. Whether these would be seen as separate investors for the criteria of 50 investors is yet to be seen. Lastly, the change in proposed regime also depends on the assessing officer’s treatment with respect to accepting/rejecting the valuation methods. It is suggested that the Government issue a set of guidelines to the assessing officers regarding the fixed set of criteria for acceptance/rejection of valuation methods. This would allay fears of the enterprises regarding the valuations.

Way Forward

Despite the aforementioned concerns, it is pertinent to note that the CBDT’s proposed amendments are admirable and will bring significant help to enterprises seeking money from non-resident investors. The addition of a safe harbour rule and the relaxation of the requirement to acquire merchant banker’s reports before the valuation date addresses practical issues that taxpayers experience during the valuation process. The principle of presumed FMV will also lessen value disagreements. The CBDT will soon issue draught rules for public consultation over 10 days. It will be fascinating to see how the new non-resident valuation procedures match with the Foreign Exchange Management Act 1999.