Central Idea

• The government has introduced revisions to the angel tax provisions that were initially implemented in this year’s Budget, primarily targeting investments by non-resident investors into startups at a premium over their fair market value.

Key changes introduced

• The Central Board of Direct Taxes issued a notification, amending Rule 11UA under the Income Tax Act, incorporating changes to the draft norms released earlier.
• Five distinct valuation methods for shares have been introduced, accompanied by a 10% tolerance allowance for deviations from accepted share valuations.
• These changes aim to provide some relief to prospective foreign investors interested in Indian startups.

 What is Angel Tax?

• Referred to as Angel Tax, this rule is described in Section 56(2)(viib) of the Income Tax Act, 1961.
• Essentially it’s a tax on capital receipts, unique to India in the global context.
• This clause was inserted into the act in 2012 to prevent laundering of black money, round-tripping via investments with a large premium into unlisted companies.
• The tax covers investment in any private business entity, but only in 2016 was it applied to startups.

Why was angel tax introduced?

• The complicated nature of VC fundraising with offshore entities, multiple limited partners and blind pools is contentious.
• There has been some element of money laundering or round-tripping under guise.

Details of its levy

• The Angel Tax is being levied on startups at 9% on net investments in excess of the fair market value.
• For angel investors, the amount of investment that exceeds the fair market value can be claimed for a 100% tax exemption.
• However, the investor must have a net worth of ₹2 crores or an income of more than ₹25 Lakh in the past 3 fiscal years.

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