New Delhi: In a major decision notified this week, the Union government has excluded the country’s two biggest sources for foreign investment from the list of the countries exempted from angel tax. These are Mauritius and Singapore, two most preferred routes for foreign investors to invest in India.
A list of 21 countries notified by the Central Board of Direct Taxes (CBDT) does include the countries such as the United Kingdom, USA, France, Japan, Russia, Israel and Australia, traditional trading partners of India, however, keeping the two most favoured routes of investment – Singapore and Mauritius – has raised eyebrows.
It is not only Singapore and Mauritius; the new list also excludes another major source of investment - Ireland and also the Netherlands and Luxembourg. The countries that are exempted from the levy of angel tax are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Korea, New Zealand, Norway, Russia, Spain, Sweden, United Kingdom, and the United States.
Tax exemption for specific category of investors
However, the notification issued by the CBDT only exempts a certain category of investors from these countries whose investment in an Indian startup qualifies for exemption from the levy of angel tax. These are Government and Government related investors such as central banks, sovereign wealth funds, international, or multilateral organizations or agencies including entities controlled by the Government or where direct or indirect ownership of the Government is seventy-five percent or more.
Secondly, Banks or Entities involved in Insurance Business where such an entity is subject to applicable regulations in the country where it is established or incorporated or is a resident. Thirdly, the list also covers those entities from the above mentioned 21 countries that have been registered with Securities and Exchange Board of India (SEBI) as Category-I Foreign Portfolio Investors or they are endowment funds associated with a university, hospitals or charities.
The angel tax exemption from these 21 countries will also be given to pension funds created or established under the law of these countries or specified territories. The exemption will also be applicable to the Broad Based Pooled Investment Vehicle or fund where the number of investors in such a vehicle or fund is more than fifty and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.
What is Angel tax on startups?
Angel investors are those investors who are willing to invest in a new company, usually startups, as founders are not able to raise money otherwise. As per the provisions of Section 56(2) of Income Tax Act, unlisted companies are required to pay on the funds they generate by issuing shares to angel investors. This tax is only levied when the share price of issued shares exceeds the company's fair market value as per the government's assessment. Angel tax was first introduced in the finance bill of 2012.
This value is seen as an income rather than as an investment and is considered fit for levy of angel tax. However, in 2019 Lok Sabha elections, the opposition raised the issue of angel tax on startups as some changes made in the rules ahead of the general elections were seen affecting the startups. Later on, the government relaxed several rules related to angel tax for the DPIIT recognized startups.
