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02 Jul 2024

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

02 Jul 2024
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*.

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

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

Posted by
Treelife
Last updated on
Jul 02, 2024, 2:11pm

Disclaimer:

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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