Finance Ministry Exempts Certain Countries from Angel Tax on Investments in Indian Startups

As per notification no. S.O. 2274(E) issued by the Ministry of Finance, Government of India - investments in unlisted Indian companies from 21 countries, including the United States of America, the United Kingdom, and France, have been exempted from the country’s angel tax.

Excluded Countries

The United States of America, the United Kingdom, Australia, Germany, Spain, Austria, Canada, the Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand, and Sweden are among those exempts. However, Singapore, the Netherlands, and Mauritius, all of which offer considerable FDI to India, are noticeably absent from the list.

Backdrop

Before this notification, the government applied the angel tax to foreign investments in unlisted, closely held companies, except for DPIIT-recognized entrepreneurs. As a result, the startup and venture capital industries sought exemptions for certain kinds of foreign investors.Furthermore, entities registered with the Securities and Exchange Board of India (“SEBI”) as Category-I Foreign Portfolio Investors (“FPI”), Endowment Funds, Pension Funds, and broad-based pooled investment vehicles will be immune from the angel tax provision, according to the Central Board of Direct Taxes (“CBDT”).

Implications

The angel tax exemption for investments from 21 countries with strong regulatory systemsis projected to boost FDI and significantly expand capital availability for Indian companies. Concerns have been expressed about the exclusion of nations such as Singapore, the Netherlands, and Mauritius, which are key contributors of FDI in India. This exclusion may lead to a discrepancy in the types of investors, which may have ramifications for enterprises that rely on investment from these countries. The particular mention of the listed countries, on the other hand, intends to improve perceptions of India’s investment ecosystem and attract more FDI from these countries.

The introduction of the valuation criteria for non-resident investments in unregistered companies is keenly anticipated by investors, as this will play a critical role in deciding the income tax that will be applied to the investments. To sustain a fair and inclusive investment climate in the Indian startup ecosystem, consistent and transparent rules that provide a level playing field for all investors and address stakeholders’ concerns are required.

Conclusion

Before this change, only investments in closely held businesses made by residents or domestic investors were liable to an angel tax overfair market value. The Finance Act, 2023 broadened the tax’s scope to include investments worth more than their fair market value, regardless of where the investor is located.Although the Finance Ministry’s new notification eases limits on foreign investments in Indian companies, there are still concerns about the exclusion of significant countries and the impending valuation standards. The government aims to attract FDI from countries with strong regulatory systems, but stakeholders want tax laws that are more consistent and clearer.