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Business News/ Companies / Start-ups/  Govt looks to resolve angel tax concerns

Govt looks to resolve angel tax concerns

Following the Union budget proposal to subject foreign investors to angel tax, startups have expressed apprehensions about securing funding.

Startups worry that the tax may deter foreign investors Premium
Startups worry that the tax may deter foreign investors

NEW DELHI:The department for promotion of industry and internal trade (DPIIT) is working with the finance ministry to resolve the concerns of startups regarding the contentious angel tax and fair market valuation, a top government official said.

Following the Union budget proposal to subject foreign investors to angel tax, startups have expressed apprehensions about securing funding.

Angel tax is levied on the capital raised by an unlisted company by selling shares to investors above the fair market value. Indian startups already facing a funding freeze worry that the angel tax may further deter foreign investors, given that they often sell shares at a high premium based on future growth prospects. The provision, scheduled to take effect on 1 April 2024, remains unchanged in the Finance Bill for the current fiscal year. The startup sector is already grappling with decreased funding, as foreign private equity and venture capital investments in Indian startups dropped to $54 billion in 2022 from $77 billion the prior year. Furthermore, startup deal volume in India reached a nearly nine-year low in February, reflecting weak sentiment within the ecosystem.“There are concerns regarding angel tax coming from startups, and DPIIT is taking it up with the department of economic affairs and department of revenue. Calculation of their fair market value (FMV) is different, which is taken internationally and by income tax [department]. DPIIT is just trying to get them on the conversation table. Tell them that there is a discrepancy and find some solution," the official said, requesting anonymity.

Mint had earlier reported that the government is contemplating exempting foreign funds from angel tax compliance, and rules on angel tax are expected to be issued this month, outlining exemptions for select foreign entities that are bona fide investors. The first set of foreign funds likely to be exempted includes sovereign wealth funds such as Abu Dhabi Investment Authority, GIC, and Qatar Investment Authority. This is due to concerns that the potential impact of Section 56.2 Vii B tax could negatively affect foreign investments, which may undermine the government’s infrastructure investment push. The government has previously argued that the angel tax, or Section 56(2) VII B, targets ‘hawala’ transactions rather than startups and that ending ‘preferential treatment’ for foreign investors would level the playing field since Indian residents are already subject to this tax. However, the industry argues that, in practice, the law affects a significant number of startups and investors. Queries sent to the spokespeople for ministries of commerce and finance remained unanswered till press time. Anurag Jain, secretary of DPIIT, said that angel tax would not apply to startups registered with the DPIIT, which currently number around 95,000. Tax experts said that angel tax is applied when the share price assigned to investors exceeds FMV of the share.

The difference is then subject to Section 56 (2) VII B, which experts say could lead more startups to consider relocating overseas, as foreign investors may avoid additional tax liabilities stemming from their investment in the startup.

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Published: 13 Apr 2023, 12:02 AM IST
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