No change in angel tax, draft rules to come in April

New Delhi: The Finance Bill, 2023, unveiled by Finance Minister Nirmala Sitharaman on February 1, had proposed to amend Section 56(2) VII B of the Income Tax Act. The provision, colloquially known as the ‘angel tax’ was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares.
The Finance Ministry has said that it will address concerns raised by start-ups over its provision on ‘angel tax’ and issue draft rules next month on issues of valuation and exemptions for taxation on investments from foreign investors.
“…all concerns raised by stakeholders in implementation of this proposal would be addressed. The draft rules related to valuation shall be shared with the stakeholders for their inputs in April itself, and exclusions, currently provided to domestic Venture Capital Funds etc, shall also be considered for similar overseas entities,” the ministry said in a background note.
As the Parliament passed the Finance Bill, 2023 with 45 amendments on Friday, the new provision on bringing parity between domestic and foreign investors in start-ups has remained unchanged.
The Finance Bill, 2023, unveiled by Finance Minister Nirmala Sitharaman On February 1, had proposed to amend Section 56(2) VII B of the Income Tax Act. The provision, colloquially known as the ‘angel tax’ was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares.
The provision states that when an unlisted company, such as a start-up, receives equity investment from a resident for issue of shares that exceeds the face value of such shares, it will be counted as income for the start-up and be subject to income tax under the head ‘Income from other Sources’ for the relevant financial year.
However, with the latest amendment, the government has proposed to also include foreign investors in the ambit, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable. For instance, if the fair market value of a start-up share is Rs 10 apiece, and in a subsequent funding round they offer it to an investor for Rs 20, then the difference of Rs 10 would be taxed as income.
After the change was proposed in this year’s Union Budget, it sent shockwaves down the start-up ecosystem which was already dealing with a dearth of funds owing to geopolitical tensions and rising interest rates.
Agencies

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