Angel tax draft rules likely in 10 days; may clear the air on valuation

The development comes in the backdrop of the Union Budget 2023-24 extending the angel tax provisions to transactions involving foreign investors

The government will soon release draft rules to address the valuation-related concerns of start-ups pertaining to the angel tax provisions introduced in the last Union Budget.

The finance ministry is likely to release the draft rules over the next 7-10 days, a senior government official said.

The Union Budget 2023-24 extended the angel tax provisions to transactions involving foreign investors, in line with the government’s anti-tax avoidance move. The aim was also to bring parity in taxation for foreign and domestic investors. Earlier, these provisions were applicable only to local resident investors.

According to the new provisions, angel tax will be applied on the premium to the fair market value (FMV) of a company’s shares during a funding round to raise capital. The excess premium received on sales of shares by an Indian unlisted company to a foreign investor will be construed as “income from other sources” and taxed.

The new provisions have become a cause for concern for privately held companies, as the amendment to the Finance Act, 2023, will hurt investment by overseas investors into India. Early-stage start-ups are likely to be the worst hit since they witness comparatively higher deviation in allotted share prices and fair market value.

The Department for Promotion for Industry and Internal Trade (DPIIT) has had extensive consultations with key industry associations, including Indian Private Equity and Venture Capital (IVCA), Confederation of India Industries (CII), Federation of Indian Chambers of Commerce and Industry (FICCI), NASSCOM, and have taken inputs from them. The industry department has also done two rounds of meetings with the finance ministry’s economic affairs and revenue department to take up the start-ups’ concerns.

Apart from that, the revenue department has had one-on-one consultations with the industry, the official cited above said.

“The draft will address the issue of differences in valuation techniques used in the income tax act and FEMA (foreign exchange management act). The dichotomy will (most likely) be done away with,” the official said. Since valuation criteria at the moment are different under FEMA and the Income-Tax Acts, start-ups had expressed their fear that it could result in litigation.

 

TAX PROVISIONS
 

Union Budget extended angel tax provisions to transactions involving foreign investors

Angel tax is now applicable on the premium to the fair market value of a company’s shares

Excess premium received on sales of shares by an Indian unlisted company to a foreign investor is construed as “income from other sources” and will be taxed

Early-stage start-ups are likely to be the worst hit