 "Angel Tax")
Top venture capital (VC) investors and start-ups have welcomed the government’s proposal to make changes to angel tax rules. They said the move is expected to help start-ups deal with the current funding winter.
The government also notified foreign entities that they would be exempt from tax provisions. These entities include government and government-related investors such as central banks, sovereign wealth funds, international or multilateral organisations, and agencies, including entities controlled by the government or where direct or indirect ownership of the government is 75 per cent or more.
Karthik Reddy, managing partner of Blume Ventures and chairperson of the Indian Venture and Alternate Capital Association, said that the notification from the Central Board of Direct Taxes (CBDT) and the Ministry of Finance has been well received by the private equity and VC industries as it provides greater clarity to Indian start-ups and investors in relation to Section 56(2)(viib).
"The proposed norms aim at expanding valuation methodologies and eliminating price differentials between resident and non-resident investors," said Reddy.
CBDT has widened the valuation methods under the angel tax provision on investment by foreign investors in start-ups to bring clarity and end tax disputes.
Mayank Singh, co-founder of Campus 365, said increasing the valuation methods to include five more options provides enhanced flexibility to both resident and non-resident investors.
He said the provision to account for foreign exchange fluctuations, bidding processes, and economic indicators is a significant step towards managing the unpredictability in the value of unquoted equity shares.
"A safe harbour of 10 per cent variation in value is a considerate move in these dynamic market conditions," he added.
Siddarth Pai, co-founder of 3one4 Capital, said measures such as a safe harbour for a variation of 10 per cent of the price, different valuation methodologies, and exempting investments from a broader set of investors reflect market practices and lay to rest investor fears.
The proposed changes also apply to a pooled investment vehicle or fund where the number of investors in such a vehicle or fund is more than 50 and such a fund is not a hedge fund or a fund that employs diverse or complex trading strategies.
"Some terms, such as a broad-based fund of 50 people, will be tough to enact as large VC funds tend to work only with select investors," said Pai.
Ruchi Khajanchi, chief financial officer at growth-stage investor A91 Partners, said the proposed changes would bring respite to the venture ecosystem.
"However, challenges may still arise if the difference between the primary and secondary valuations exceeds 10 per cent in the case of investments by a non-exempt investor," she said.
Kavit Sutariya, general partner at CapFort Ventures, was of the view that the subsequent phase should involve the inclusion of individual angel investors in India. He said this would extend crucial support to local investors and empower smaller start-ups in their early stages.
"The intended regulations seek to broaden the scope of valuation methodologies and eradicate price differences between resident and non-resident investors," he said.
Manish Khanna, co-founder of Unlisted Assets, said an amendment to Section 56(2)(viib) of the Income-Tax Act, 1961, to bring the consideration received from non-residents for the issue of shares within the ambit of the law, was a welcome step by the government to bring parity between residents and non-residents.
"However, it applies to only notified entities. We need to see the applicability once the entities are notified," he said.
On valuation methodologies, Khanna said introducing five new methods gives valuers a wider scope for applying discretion, which has now been fixed with merchant bankers.
Vaibhav Gupta, partner at Dhruva Advisors, said deeming the value at which funds are raised from notified non-residents as the fair market value (FMV) was an interesting proposition. It aligns with the Foreign Exchange Management Act provisions, which permit raising funds from non-residents at a value higher than the certified FMV.
"The government should also consider increasing the financial threshold for exempting the Department for Promotion of Industry and Internal Trade-registered start-ups, which is currently capped at Rs 25 crore of paid-up capital and share premium," he added.
