Article Begins:
The Central Board of Direct Taxes (CBDT) has made a significant declaration in the investment sector. The body has proposed to exclude some groups of investors from the payment of angel tax, aiming to stimulate investments in start-ups and alleviate their tax burden. Along with this, CBDT introduced five new valuation methods for resident investors, thus no longer limiting them to the Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods only.
Understanding Angel Tax
Angel tax, a term first coined in 2012, was designed to curb the creation and deployment of unaccounted money through investments in privately owned companies. This tax is applicable to unlisted companies that raise funds via off-market transactions by issuing shares exceeding the company’s fair market value (FMV). FMV represents the price of an asset agreed upon by a buyer and seller, both having reasonable knowledge about it and wishing to trade without undue pressure.
CBDT’s Recent Revisions Related to Angel Tax
There are several modifications that CBDT has recently implemented pertaining to the angel tax.
Inclusion of Foreign Investors in the Scope of Angel Tax
The Finance Act of 2023 led to amendments in a specific section of the Income-tax Act, incorporating foreign investors within the scope of the angel tax provision. Previously, if a start-up received equity investment from a resident exceeding the face value of its shares, it was considered as income for the start-up and consequently, liable to income tax under ‘Income from other Sources’ for that fiscal year. With the recent amendment, this rule now also applies to foreign investors. As a result, startups raising capital from foreign investors would be subject to taxation. However, startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) are exempted from this rule.
Exemption Clauses for Government and Certified Investors
The CBDT has identified specific investor groups who will be exempted from the angel tax. These are government and related entities such as central banks, sovereign wealth funds, international or multilateral organizations, or where government ownership is75% or more. Banks and insurance businesses have also been exempted. Entities registered with SEBI as Category I Foreign Portfolio Investors (FPI), endowment funds, and pension funds are included in the list of exemptions. Broad-based investment vehicles or funds exceeding 50 investors, provided they aren’t hedge funds, are also given exemption.
Proposed Amendments in Valuation Methods
The CBDT proposal suggests that if a non-resident entity approved by the central government provides consideration to a company for issuing shares, the FMV of those shares could be determined based on the price corresponding to that consideration. However, this consideration should not exceed the total consideration received from the notified entity within 90 days of share issuance.
The article concludes on a note concerning the UPSC Civil Services Examination, where a previous year question has been mentioned that asks candidates to identify what registered foreign portfolio investors issue to overseas investors who wish to participate in the Indian stock market without direct registration. The answer is Participatory Note.
