The Central Board of Direct Taxes (CBDT) has recently issued a notification that brings relief to investors in unlisted Indian startups. The notification specifies 21 countries whose non-resident investments in these startups will be exempt from the angel tax provision. This move is aimed at promoting foreign investment in the country's startup ecosystem.
The government had earlier brought overseas investments in unlisted closely held companies under the purview of angel tax, except for DPIIT (Department for Promotion of Industry and Internal Trade) recognized startups. However, the startup and venture capital industry expressed concerns and sought exemptions for specific categories of overseas investors.
On May 24, the CBDT released the list of excluded entities that will not be subject to angel tax. This includes investors registered with SEBI (Securities and Exchange Board of India) as Category-I Foreign Portfolio Investors (FPIs), Endowment Funds, Pension Funds, and broad-based pooled investment vehicles. These entities should also be residents of any of the 21 specified nations, such as the United States, United Kingdom, Australia, Germany, and Spain, as mentioned in the notification.
It's important to note that the notification does not include certain countries like Singapore, Netherlands, and Mauritius, which are major sources of inbound foreign direct investment (FDI) in India. The explicit mention of the selected countries aims to attract more FDI from nations with robust regulatory frameworks.
Rakesh Nangia, Chairman of Nangia Andersen India, commented on the notification, stating that the absence of countries like Singapore, Ireland, Netherlands, and Mauritius is surprising, considering their significant contribution to inbound FDI in India.
While this notification provides relief to investors from the specified countries, stakeholders are still awaiting a formal notification on valuation guidelines. The CBDT is expected to release valuation guidelines for non-resident investments in unrecognized startups, which will be crucial for income tax assessment purposes.
Previously, only investments made by domestic investors or residents in closely held companies were subject to taxation above the fair market value, commonly referred to as angel tax. However, the Finance Act of 2023 introduced amendments that expanded the scope of taxation to include investments above the fair market value, regardless of the investor's residency status.
Stakeholders have raised concerns about the calculation of fair market value under different laws, and the CBDT is expected to address these concerns through the forthcoming valuation guidelines.
The recent CBDT notification brings clarity and exemptions for foreign investors in Indian startups, promoting ease of doing business and encouraging investments in the country's vibrant startup ecosystem. It is a positive step towards attracting global capital and fostering innovation and entrepreneurship in India. Stay tuned for further updates on startup taxation and regulatory developments.