Last Update: February 03, 2023, 18:40 IST
The extension of these rules to foreign investors could increase the tax burden on start-ups, affecting their valuation and funding regime (Image: Shutterstock)
Explained: Extension of angel tax rules to foreign investors in India may impact popular deal structures and valuation strategies of Indian start-ups
Finance Minister nirmala sitharaman In his budget address, he suggested increasing the date of incorporation from March 31, 2023 to March 31, 2024 for start-ups to qualify for income tax incentives. The finance minister in his budget speech also suggested the benefit of carrying losses for new firms over a 10-year-long term. The report states that this would provide greater financial security to startups and help them expand their ventures by allowing them to carry forward their business losses for ten years instead of the previous five years. However, the extension of angel tax rules to foreign investors in India may affect the popular deal structures and valuation strategies of Indian start-ups.
What is angel tax?
Extending these rules to foreign investors could increase the tax burden on start-ups, affecting their valuation and funding regime. Angel tax is a tax levied on capital raised by firms from angel investors. This is believed to have an impact on the Indian startup ecosystem, making it difficult for start-ups to raise capital and expand their operations, according to a report. times of India Said.
It is a tax levied under section 56(2)(viib) of the Income Tax Act of 1961 (the Act) on capital raised by privately held companies by issue of shares to a resident for which the consideration exceeds the face value and is issued Fair market value (FMV) of the shares held. In the startup community, this tax is commonly referred to as the “angel tax”. Wealthy individuals (called “angels”) who make significant investments in start-ups and risky businesses during their early stages, before they can turn a profit. The widespread recognition has given rise to the term “angel tax”, explained in an Outlook report.
Rationale for Angel Tax
The main goal of this taxation is to implement measures to tax the excessive share premiums private corporations receive over and above the FMV, often as a cover for previously unexplained wealth and as a means of collecting corporate kickbacks. was used. The report states that this is essentially one of the anti-abuse rules that were implemented to prevent money laundering.
What is the proposed change?
Sitharaman in her budget presentation included a proposal to change section 56(2) VII B of the Income Tax Act.
As per the provision, equity investment received by an unlisted company, such as a start-up, against issue of shares from a resident, in excess of the face value of those shares, shall be treated as income for the start-up. and will be subject to income tax under the head “Income from other sources” for the applicable financial year, said a report in the Indian Express.
The government recently suggested expanding the scope of the law to include foreign investors, which means any start-up acquired from a foreign investor will now be treated as income and subject to taxes.
according to a PwC India The transition comes as funding for India’s startups is set to decline by 33% to $24 billion in 2022, according to an analysis published in January.
Foreign investors are an important source of capital for startups and have increased their valuations significantly.
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