No angel tax on funding from 21 nations

NEW DELHI: Non-resident investments into privately-held Indian startups from 21 countries, including the US, the UK, Germany and France, will not attract angel tax, the finance ministry has notified.

The list, however, excludes investment from key countries like Singapore, Netherlands and Mauritius. "It is notable that many popular jurisdictions such as Singapore, Mauritius, Cayman, Netherlands, Cyprus, UAE have not been covered in the list of notified countries and hence investments raised from funds registered in these countries will not be exempted. Singapore, Mauritius, UAE and Netherlands were part of the top five jurisdictions for FDI inflows into India during 2022. The decision not to exempt funds from these countries will limit the benefit of this notification for Indian startups," said Vaibhav Gupta, partner at Dhruva Advisors.

The government had in the Budget expanded scope of the angel tax to include investment from foreign investors. Startups, which are already struggling to navigate the funding winter, has been seeking exemption for certain overseas investor classes. Experts had earlier said startups facing angel tax notices have to pay 25% investment raised as tax and twice that as penalty for violating the exemption conditions.

The Central Board of Direct Taxes (CBDT) on May 24 notified classes of investors, who would not come under the angel tax provision. Excluded entities include those registered with Sebi as category-I FPI, endowment funds, pension funds and broad-based pooled investment vehicles, which are residents of 21 specified nations, including the US, UK, Australia, Germany and Spain.

Late last week, the government had proposed a host of changes to tax levied on angel investors in unlisted entities, including expanding the scope of valuation methodologies.