The Angel Tax Overhang

The extension of angel tax rules to investments by non-residents has raised concerns over the valuation of start-ups and sparked fears of calls from tax authorities. The industry is hoping that this decision will be reviewed

- SURABHI

IF BEAUTY LIES in the eyes of the beholder, does valuation lie in the eyes of the investor? That’s the question startups in India seem to be grappling with thanks to the new angel tax norms that kicked in this fiscal, as these question the very basis of funding for such ventures.

Start-ups, already dealing with a funding winter, are trying to assess the impact of the angel tax norms that the Union Budget 2023-24 extended to non-residents. Despite several exemptions provided by the Central Board of Direct Taxes (CBDT), the start-up community is ill at ease over how to justify valuations as well as the higher compliance burden.

According to the reply to an RTI application filed by BT, only 8,204 start-ups have received exemption from angel tax. In all, 114,000 start-ups are registered with the DPIIT and 10,939 start-ups have applied for exemption from the tax, the reply reveals.

“The angel tax amendments to include non-resident investors have injected material uncertainty into the investment process. A lot more time is being spent to navigate the valuation requirements under the Companies Act, 2013, Foreign Exchange Management Act, 1999, and the Income Tax Act, 1961,” says Siddarth Pai, Founding Partner of 3One4 Capital, and Co-chair of Regulatory Affairs Committee at the Indian Venture and Alternate Capital Association (IVCA). He adds that for the same transaction, there can now be four different valuation reports under these three bodies of law.

WHAT IS ANGEL TAX?

Originally introduced in 2012, angel tax was aimed at curbing shell companies and money laundering

It is levied at a rate of up to 30.6 per cent when an unlisted company issues shares to an investor at a price higher than its fair market value