Budget 2023 – Applicability of Angel Tax for foreign investors from April 1, 2023

If you are a foreign investor investing in Indian companies or a startup raising money from foreign investors post April 1, 2023, angel tax is now applicable. We have summarized the implications for you below

Upto March 31, 2023:

Non-resident investors (typically offshore PE/VC funds) generally made primary investment in Indian startups at a price which was above the FMV as per the valuation report without there being any income tax implications. The reason was that it allowed investor to have room to exercise their anti dilution liquidation preference rights by revising the conversion ratio incase of a down round*.

From April 1, 2023 onwards:

While the FEMA pricing rules as discussed above continue as it is, section 56(2)(viib) of the Income-tax Act, 1961 now provides that the Indian company will be liable to pay tax if it issues shares to a non-resident at a price above its FMV (as determined by a merchant banker). Thus, Indian company will have to issue shares to non-resident investors exactly at FMV.

Further, implementation of such investor protection clauses may not be as straightforward and the non-resident investors will need to look at alternate options such as rights issue or bonus issue or buyback, etc

*As per FEMA rules, price at the time of conversion should not be lower than the FMV at the time of issuance

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Jitesh Agarwal

Founder | [email protected]

Leads the VCFO, finance tax, and regulatory functions at Treelife. Responsible for the firm’s non-operational growth and providing strategic advisory in GIFT City, helping clients navigate complex regulatory landscapes effectively.

Priya Kapasi Shah

Associate Partner | Tax & Regulatory | [email protected]

Heads Treelife’s Financial Advisory practice, specializing in investment structuring, cross-border transactions, and tax and regulatory advisory. Also leads on AIF setups and advisory services for GIFT IFSC.

Rohit Gandhi

Senior Associate | Tax & Regulatory | [email protected]

Specializes in financial due diligence, valuations, business structuring, and income tax advisory. Contributes to the Financial Advisory team by helping startups and businesses make informed strategic decisions.