Angel Tax: New Tax Exemption Rule To End Startup Funding Crunch

Days after the tax department proposed to exempt SEBI-registered FPIs, pension funds and SWFs from the purview of angel tax, the government has notified 21 countries from where non-resident investment in unlisted Indian startups will not attract angel tax.

Seen as breather for startups struggling with funding shortage, the Angel Tax will not be imposed on foreign investment made in unlisted Indian startup firms from 21 countries including the US, UK and France.

However, this list does not include investments coming from countries like Singapore, Mauritius and UAE though highest FDI in India comes from these countries. The government stated in the FY 2023-24 budget that investments in all unlisted companies except for startup companies recognized by the Department of Industry Promotion and Internal Trade (DPIIT) an angel tax will be levied. Since then, the startup and venture capital industry was seeking tax exemption for investment coming from certain countries.

The Central Direct Tax Board (CBDT) issued a notification on Wednesday stating that investors of certain categories would not fall within the scope of the Angel Tax provision. These categories include first class foreign portfolio investors registered with SEBI ( SEBI), endowment funds, pension funds and investments with participation from residents of 21 countriesm. This notification has become effective from April 1, 2023. Countries included in the tax exemption include — Canada, Austria, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, in addition to the US, UK, Australia, Germany and Spain, Korea, Russia, Norway, New Zealand and Sweden.

On May 24, CBDT notified the classes of investors who would not come under the Angel Tax provision. The entities that are excluded are –

• Those registered with SEBI as Category-I FPI, Endowment Funds, Pension Funds and broad-based pooled investment vehicles, which are residents of 21 specified nations as per the notification.
• Banks or regulated entities involved in insurance business, and entities registered with Sebi as Category I foreign portfolio investors (FPIs), endowment fund and pension fund are also in the proposed exempted list.

The so called angel tax which is applicable to startups is essentially a tax levied on the capital raised by a company and was introduced originally in the 2012 Budget. Until the 2023 Budget, the tax was applicable only to domestic individual investors. However, in the 2023 Budget, both foreign investors and NRI investors were also brought under the ambit of the angel tax.

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