Until 1 April 2023, Indian closely held companies were subject to “Angel Tax” only with respect to shares (including preference shares) issued to resident investors. Angel Tax is an anti-abuse provision wherein Indian closely held companies are subject to tax on the excess of the issue price received over the fair market value (“FMV”) of the shares.
Vide Finance Act, 2023 and with effect from 1 April 2023, a significant amendment was made to the Angel Tax provisions whereby the said provisions were extended to shares issued by an Indian closely held company to a non-resident. Consequently, any investment by a non-resident in an Indian closely held company, in excess of the FMV of the shares of such company shall be taxable in the hands of the company to the extent of such excess amount.
With a view to provide certain relaxations, the Indian Central Board of Direct Taxes (“CBDT”) has issued notification dated 24 May 2023 exempting the following class of investors (“Notified Investors”) from the applicability of Angel Tax provisions:
- Government and Government related investors such as central banks, sovereign funds, government-controlled agencies or where direct or indirect ownership of Government is 75% or more.
- Banks or entities involved in insurance business (where it is subject to applicable regulations in the country where it is established or incorporated or is a resident).
- Any of the following entities, being a resident of specified country (21 countries have been notified which inter-alia includes Australia, Belgium, Denmark, Germany, Russia, UK, France, USA) and such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident:
- Category I Foreign Portfolio Investors registered with Securities and Exchange Board of India;
- Endowment Funds associated with a university, hospitals or charity;
- Pension funds created or established under laws of foreign country or specified country; and
- Broad Based Pooled Investment Vehicle/ Fund where the number of investors is more than 50 and the fund is not hedge fund or a fund employing diverse/ complex strategies.
Additionally, any investment made in an eligible Indian start-up duly registered with the Department for Promotion of Industry and Internal Trade continues to enjoy an exemption from the applicability of the Angel Tax provisions.
Further, for the purposes of computing the FMV for Angel Tax provisions, the CBDT has recently notified various valuation methodologies for determining the FMV of unquoted equity shares and compulsory convertible preference shares (“CCPS”) and a safe harbor of 10%.
One interesting methodology which has now been introduced is the price matching facility for both resident and NR investors. In terms of such price matching facility, the price at which unquoted equity shares or CCPS are issued by Indian closely held companies to Notified Investors/ venture capital funds/ specified funds shall be adopted as FMV for the purposes of benchmarking equity and CCPS investments by investors, subject to the condition that the consideration received from other investors at such FMV does not exceed aggregate consideration received from Notified Investors/ venture capital funds/ specified funds.
The earlier valuation rules required merchant banker DCF valuation report as on the date of issue of shares. The amended valuation rules provide flexibility by making valuation report issued up to 90 days prior to the date of issue of equity shares or CCPS acceptable for computing FMV for investments by both resident and NR investors.
Impact of the amendment
While the inclusion of the non-residents within the ambit of Angel Tax Provisions may have an impact on the foreign investment in India, however, the flexibility to non-residents in determining the FMV is a welcome step and will help various private equity investors who enter in unique arrangements with the Indian companies/ promoters for variable pricing of shares based on various external and internal parameters.
If you wish to discuss these topics, please contact:
Dhruva Advisors LLP
