India Proposes Modifications to Taxation of Angel Investors in Unlisted Companies

• ByStartupStory     |    May 20, 2023

On Friday, the Indian government put forth proposals for modifying the tax applicable to angel investors in unlisted entities, aiming to exempt certain categories of foreign investors from such levies.

According to a statement from the federal finance ministry, investments made by central banks, sovereign wealth funds, and government-controlled entities with direct or indirect ownership of 75% or more in Indian unlisted companies would be exempted from the provisions of the so-called “angel tax.”

Angel tax refers to the tax levied when shares of an unlisted entity are issued to an investor at a price higher than its fair market value. Initially applicable to Indian resident investors, this tax was scheduled to be extended to non-resident investors from April 1, 2024.

The provisions of the tax will also exempt Category-I foreign portfolio investors registered with the Securities and Exchange Board of India, as well as endowment and pension funds, banks and insurance companies incorporated in India, and pooled investment vehicles with more than 50 investors.

The government has broadened the range of valuation methodologies available for calculating gains. A total of five valuation methods can now be employed to assess the value of shares in an unlisted company. In order to maintain equality in investments between resident and non-resident investors, the share prices will be referenced to investments made by venture capital funds, according to the statement.

To accommodate fluctuations in foreign exchange rates and changes in economic indicators that could impact share valuation in multiple investment rounds, a provision of 10% variation in share value has been introduced.

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