BENGALURU: Ever since the budget included non-resident investors under the ambit of angel tax, start-ups and the investment community have been raising concerns. But in March, the finance ministry said all concerns raised by stakeholders in the implementation of the proposal would be addressed, and on Friday, based on the inputs of stakeholders, in a notification, the Central Board of Direct Taxes (CBDT) exempted many foreign and Indian entities from the purview of angel tax.
Angel tax was introduced in 2012, and it is the tax that unlisted companies are liable to pay (about 30.9%) on the capital they raise through the issue of shares, and it is calculated on the basis of the premium amount received above the fair market value of the shares.
CBDT has proposed that certain classes of persons being non-resident investors to whom clause (viib) of sub-section (2) of section 56 of the Act (angel tax) shall not be applicable, and this includes central banks, sovereign wealth funds, international or multilateral organisations or agencies including entities controlled by the Government or where direct or indirect ownership of the Government is 75% or more. Start-ups and investors have welcomed these draft rules.
"The exclusions proposed for certain non-resident investors, including sovereign wealth funds and regulated entities, is a positive move that recognises the integrity of these organisations and should bring increased funding stability. This will also boost the start-up ecosystem and encourage an entrepreneurial spirit," said Mayank Singh, Co-founder of Campus 365.
To account for forex fluctuations, bidding processes and variations in other economic indicators, which may affect the valuation of the unquoted equity shares during multiple rounds of investment, it is proposed to provide a safe harbour of 10 % variation in value, CBDT said.
The inclusion of a safe harbour of 10% will allow some flexibility for the promoters to negotiate for a better price. Along with safe harbour tolerance of price variation, the exclusion of Government controlled funds, SEBI registered entities is also an added exception from these new rules, said Saurrav Sood- Practice Leader- International Tax & Transfer Pricing at SW India.
New draft rules also introduce five new methods of valuation that will provide relief to non-resident investors. Rahul Charkha, Partner, Economic Laws Practice said, "Presently, exemption from angel tax provisions is applicable where the consideration for issue of shares is received by start-ups registered with DPIIT or a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund."
He also added that usage of some hybrid instruments, flipping of holding structures to obtain funding at overseas levels, and instruments with differential rights garnering differential valuation are some of the prevailing practices that the companies are resorting to for raising funds from overseas investors.
10% safe harbour
To account for forex fluctuations, bidding processes and variations in other economic indicators, which may affect the valuation of the unquoted equity shares during multiple rounds of investment, CBDT has proposed to provide a safe harbour of 10 % variation in value.