CBDT likely to issue rules on angel tax next week: Sources

The angel tax is likely to affect the funding received by startups from foreign investors as they many a time sell shares at a high premium depending on the prospects of growth.

The central board of direct taxes (CBDT) is likely to issue the rules on angel tax next week to provide clarity on valuation and applicability as the Union Budget announced its extension to non-resident investors from April 1, a senior government official said.

“CBDT will release rules on angel tax next week,” the official told Moneycontrol.

Angel tax is levied on funds raised by an unlisted company by selling shares to investors above the fair market value. There are different valuation criteria under Foreign Exchange Management Act (FEMA) and the Income Tax Act. The difference between the two laws may lead to disputes. The startup sector has been seeking clarity on the valuation.

The Finance Ministry and the Department for Promotion of Industry and Internal Trade (DPIIT) were discussing to allay these concerns which are likely to be put out in these rules.

The rules are likely to provide the much-needed clarity on the valuation criteria, its applicability and exemption norms to the angel tax, sources said.

The angel tax is likely to affect the funding received by startups from foreign investors as they may a time sell shares at a high premium depending on the prospects of growth.

The objective of extending angel tax to foreign investors is to bring parity between resident and non-resident investors to curb black money routed through foreign entities located outside India in the form of investment in Indian entities, while never discouraging the evolving startup ecosystem.

“The adoption of two methods (viz. Income Tax Act & FEMA) of valuation is likely to cause disputes, the government should consider coordinating them to avoid confusion,” Om Rajpurohit, Joint Partner, AMRG & Associates, told Moneycontrol.

The startups registered with DPIIT are exempt from angel tax.

The industry has also been seeking exemption for the alternate investment funds that are registered with the RBI and receive foreign funding as they in turn fund Indian startups.

“It is more likely than not that the government would provide more relief to genuine startups who are otherwise not registered with DPIIT. Further, the money received from genuine investors, such as non-residents registered with the RBI, AIF funds, and so on, can be taken outside of the purview of angel tax,” Rajpurohit said.