CBDT has excluded many entities from the purview of angel tax

Angel tax is applicable on premium paid on the fair market value of shares and is applicable to ‘non-residents’ as per the Finance Act 2023. The tax authority said all government and government-related entities such as “central banks, sovereign wealth funds, international or multilateral organizations or agencies” would be exempt. It has also exempted entities where the government directly or indirectly owns more than 75%.

The notification states that banks or entities involved in insurance business will also be exempted. Other exempted entities include Category-I funds with the Securities and Exchange Board of India, foreign portfolio investors, endowment funds affiliated with a university, hospital or charitable foreign pension fund, and a broad-based pooled investment vehicle with more than 50 . investor, “that is not a hedge fund or a fund that employs diversified or complex trading strategies”.

The government’s notification is likely to come as a big relief to the investment community, who were worried that the new tax could exacerbate the ongoing funding crunch within the tech ecosystem.

Mint first reported on March 24 that the government is considering exempting foreign funds as well as funds regulated by certain entities such as the International Financial Services Centers Authority.

Companies raising capital at a premium from exempt entities will not have to pay angel tax. The tax authority has also proposed that additional five valuation methods, except the discounted cash flow and net asset value method (which are currently in use), will consider the value of shares for the purpose of angel tax.

There are other changes as well. “A major issue of the interplay of Angel Tax and the Foreign Exchange Management Act (FEMA) was the price differential between resident and non-resident investors. FEMA did not allow a non-resident to acquire securities below the FMV (fair market value) while Angel tax did not allow a company to issue shares above fair market value. Now, price matching with venture capital funds will be taken as fair market value,” said Siddhartha Pai, co-founder of 3one4 Capital and said co-chairman of the regulatory affairs committee of the Indian Private Equity and Venture Capital Association.

“Earlier, even a small difference could trigger Angel Tax. The government has now specified 10% variation as acceptable,” Pai said.

Besides this, the assessment report now has a valid tenure of 90 days from the earlier unspecified time period, he said.