Angel Tax now applies to non-resident investors as well

A Finance Bill amendment to Section 56(2)(viib) of the Income Tax Act -popularly known as angel tax in startup circles- has the potential to impact foreign investments in startups and create more litigations.

Budget 2023 has now bought non-resident investors too under the ambit of Angel Tax, and startups will now need to justify the valuation of foreign investments and pay tax on share premium received in excess of fair market value.

Initially introduced in 2012 to curb money laundering, the provision taxes a closely held company on the premium received from a resident subscriber which is in excess of the fair market value of the shares (determined in a prescribed manner). While this was applicable only to shares issued to resident Indians earlier, it has now been extended to non-residents.

"This will make the provision applicable for receipt of consideration for issue of shares from any person irrespective of his residency status," the Finance Bill said. However, eligible startups registered with the DPIIT and possessing IMB (Inter-ministerial Board) certification, will not be impacted by this.

"Most startups raise money from foreign investors, and these investments will now come under scrutiny, and attract litigation as startup valuations are subjective and often challenged by tax officials," S Vasudevan, executive partner, Lakshmikumaran & Sridharan Attorneys, said.

“The so called ‘Angel Tax’ provisions do not apply to amounts received by Indian listed companies or their subsidiaries” points out Anish Thacker, a practising chartered accountant.

"Many entrepreneurs are alarmed at the re-emergence of angel tax and may seek to move overseas where such restrictions do not apply," Siddarth Pai, co-founder, 3one4 Capital, and co-chair, Regulatory Affairs Committee, IVCA, said.