Budget 2023: scope of angel tax expanded, to cover foreign funding

Privately held companies such as startups selling shares at a premium to foreign investors may require to pay additional tax, which may affect fundraising for unlisted domestic companies.

The government has proposed to extend the so-called 'angel tax’ provisions to transactions involving foreign investors. According to the proposal, the excess premium received on sale of shares by an Indian unlisted company to a foreign investor will be construed as “income from other sources” and subject to tax.

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The provisions will apply to all individual foreign resident investors, market experts told ET, adding that there is a need for further clarity on whether it will also apply to foreign investors structured as funds and institutional investors.

Until now, these provisions were applicable only to local resident investors but now the ambit has been widened to check tax avoidance.

"The inclusion of offshore VC funds as non-residents for the purpose of angel tax comes as a surprise because surely the government doesn't want to impact FDI flow … This will also create issues with multiple valuation methods for FEMA (Foreign Exchange Management Act) and tax purposes … government needs to clarify this quickly," said Anand Lunia, founding partner at India Quotient, an early-stage fund.

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The provisions were originally introduced in 2012 for Indian residents as a move to curb circulation of unaccounted money through share premium.

“This will create a tax liability for Indian companies and the revenue authorities may also try to question the valuation reports more often,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

The proposal has created uncertainty and fear in the minds of Indian entrepreneurs, said Siddarth Pai, co-chair, regulatory affairs committee at Indian Venture and Alternate Capital Association.

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Illustration and graphics by Rahul Awasthi