As per Finance Act, 2023, where a private company* issues shares (equity or preference) to non-resident investors** in excess of FMV, such excess consideration is taxable in the hands of private company under the head ‘Income from other sources’. Now CBDT notified below investor types as exempt from this angel tax scope.
– Government and Government related investors (such as Central banks, SWFs, Multilateral organizations, govt controlled or owned entities where govt ownership is =>75%)
– Banks or Entities involved in Insurance Business
– Entities resident in any of notified 21 countries and which are either
a) SEBI registered Category-I FPIs; or
b) Endowment funds associated with a university, hospitals or charities; or
c) Pension funds; or
d) Broad based regulated Investment funds (other than hedge funds) having no of investors > 50.
Interestingly notified countries list does not include India’s top FDI source countries such as Mauritius, Singapore, Netherlands, UAE, Cayman Islands, Cyprus etc.
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* Angel tax provisions are not applicable to DPIIT registered startups which fulfil conditions as specified in paragraph 4 of the notification G.S.R. 127(E), dated the 19th February, 2019 and which filed Form 2 with DPIIT. Note that fulfilling few of these conditions (such as no loans/advances/capital contributions/investment in securities) may be difficult
** Angel tax provisions are not applicable to investments made by Gift City AIFs