Non-resident entities such as sovereign wealth funds and pension funds from 21 countries were exempted from the angel tax. However, this list does not include Mauritius, Singapore, and Luxembourg, which account for considerable equity inflows into the country.
According to a notification issued by the Central Board of Direct Taxes (CBDT) on Thursday, private equity and venture capital investment into closely held companies routed through jurisdictions not specified will be subject to valuation scrutiny under the angel tax laws.
Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, South Korea, New Zealand, Norway, Russia, Spain, Sweden, the United Kingdom, and the United States are among the 21 countries.
Mauritius has received the most cumulative foreign direct equity investment (26 per cent since April 2000), followed by Singapore (23 per cent). According to reports, the share of the 21 approved jurisdictions is 29.1 per cent, led by the US with 9.4 per cent.
Non-resident investments, such as those made by multilateral companies, foreign banks and insurers, foreign portfolio investors, and entities registered with the Securities and Exchange Board of India (SEBI), will be exempt from the angel tax.
According to the notification, broad-based pooled investment vehicles or funds with more than 50 investors, excluding hedge funds, are also exempt from taxation.
The exemption will also be available to foreign investments in startups registered with the Department of Promotion of Industry and Internal Trade (DPIIT). However, no changes have been made to the eligibility conditions to register.
Investments by entities that have not been given a blanket exemption will have to provide valuation details to the tax authorities. The CBDT will soon issue the final notification on valuation.
FMV is determined under income tax law using either the discounted cash flow (DCF) technique or the net asset value (NAV) approach. Because startups have few assets, they adopt the DCF technique, which involves various assumptions, which frequently leads to disagreements.
The CBDT has offered five valuation procedures in the draft announcement and will accept valuation by a merchant banker.