Startup Investments From 21 Nations Will Be Excluded From Angel Tax: CBDT

The Finance Ministry has notified 21 nations, including the United States, the United Kingdom and France, that non-resident investment in unlisted Indian businesses will not be subject to angel tax. The list, however, excludes investment from Singapore, the Netherlands and Mauritius.

The government included overseas investment in unlisted closely held enterprises, save DPIIT-recognised startups, under the Angel Tax net in the Budget. Following that, the startup and venture capital industries sought exemption for specific groups of foreign investors. Following that, the startup and venture capital industries sought exemption for specific groups of foreign investors.

On 24 May, the Central Board of Direct Taxes (CBDT) announced that certain groups of investors would be exempt from the Angel Tax provision. According to the announcement, excluded entities include those registered with Sebi as Category-I FPIs, Endowment Funds, Pension Funds and broad-based pooled investment vehicles that are residents of 21 specified countries, including the United States, United Kingdom, Australia, Germany and Spain. 

Austria, Canada, the Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand and Sweden are among the additional countries included in the notification. The CBDT notification is effective on 1 April.

Rakesh Nangia, Chairman of Nangia Andersen India, stated that by openly identifying this list of countries, the government hopes to attract more foreign investment (FDI) into India from countries with strong regulatory frameworks. “Surprisingly, countries such as Singapore, Ireland, the Netherlands, Mauritius, and others, from which the majority of inbound FDI flows into India, are not mentioned in this notification,” Nangia remarked.

He added that stakeholders may still have to wait for a formal notification on the valuation criteria since rules on the subject are planned to be released following a stakeholder engagement process. The CBDT is likely to issue valuation rules for valuing non-resident investment in unregistered startups for income tax purposes. 

Previously, only investments in closely held enterprises made by domestic investors or residents were taxed beyond the fair market value. This was usually known as an angel tax. According to the Finance Act of 2023, such investments beyond the FMV will be taxed regardless of whether the investor is a resident or a non-resident.

Concerns have been raised following the revisions proposed in the Finance Bill regarding the process for calculating fair market value under two different statutes.