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India is the hub for the start-up ecosystem in the world. Many new start-ups have flourished in India. Indian Government has taken initiatives such as Start-up India, Stand-up India, Digital India, etc to give a push to the Indian start-up ecosystem. These start-ups are generally funded by high-net-worth individuals who invest their personal income in business start-ups or small to medium scaled companies. Such investors are known as angel investors. The Finance Bill introduced an angel tax provision which will come into effect from 1st April 2024.
The Finance Act, 2023 expands the applicability of section 56(2) (viib) to receipt of premium for the issue of shares from any person irrespective of the residency status thereby extending the fair market value principles to the issue of shares for the investment made by non-residents in a domestic company.
The amount which exceeds the Fair Market Value is liable to be tax in the hands of the start-up company. The purpose of extending this provision to non-resident investors is to bring parity in taxation.
In India, even the foreign exchange pricing guidelines restrict the shares issued to non-resident investors to be below the fair market value (FMV). It acts as a price floor. Now after the amendment, even the angel tax seeks to tax the amount in excess of the FMV as income in the hands of the company so the only lucrative option left with the company would be to procure investment exactly at FMV of the shares.
The levy of angel tax depends upon the FMV of the company. The income tax department goes by the rule book to calculate the FMV but the start-ups generally determine it by looking at the growth prospects and future projections of the FMV. The difference in the method of calculation might lead to the imposition of angel tax by start-ups. The tax rate of Angel tax is also high. Further, the government hasn’t even provided for any exemptions in angel tax. This discourages non-resident investors from investing in start-ups in India and encourages them to look for alternatives.
Also Read:How to Raise Angel Funding in a Start-up?Difference between Angel Investors and Venture Capital
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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