Angel tax-hit venture funds reach out to CBDT for relief
Jun 2, 2023
Synopsis
They are now planning to seek an expansion of the list of countries from where entities are eligible for tax exemption, or protective measures for money coming in from major investment centres that are currently not on the list of exempted jurisdictions.
Venture capital funds impacted by the new provisions of angel tax have approached the Central Board of Direct Taxes (CBDT), seeking relaxation of the rules that do not exempt investment in unlisted companies from destinations like Singapore, the Netherlands and the UAE from the tax.
They are now planning to seek an expansion of the list of countries from where entities are eligible for tax exemption, or protective measures for money coming in from major investment centres that are currently not on the list of exempted jurisdictions.
“Investors have sought clarity from government officials on how to bring investments from Singapore, the UAE, the Netherlands, etc., without being subject to the tax, and they have been told that the CBDT will examine these concerns," a person aware of the discussions told ET.
"The VC firms have been told to submit their concerns as well as suggestions … these suggestions will be soon submitted following which the government will take a call on what needs to be done," the person added.
The affected venture capital firms are preparing a white paper capturing their concerns and are expected to send this across to the government, sources told ET.
Angel tax is levied on unlisted companies when they issue shares at a price that exceeds the fair market value. The difference in the value is taxed at 20% or more.
Last Thursday, the CBDT issued a notification saying sovereign wealth funds, pension funds and Sebi-registered portfolio investors from 21 jurisdictions would be exempted from the provisions of angel tax.
A senior executive at a VC firm briefed on these discussions said the possibility of issuing protective measures was also brought up with the tax department so that investors from jurisdictions who make additional disclosures could be exempted from angel tax. “These could be measures such as going through some process of accreditation, or they may ask for specific information from particular firms like the source of funds, ultimate beneficial ownership, etc.,” the executive said.
An email seeking comment sent to the CBDT did not elicit a response till the time of going to press.
ET reported last week that investors were irked at the exclusion of investor-friendly jurisdictions from the list of countries exempted from the angel tax, and that they were planning to approach the government on the issue.
Industry talks continue
According to a second executive at a VC firm, the players in the venture capital ecosystem along with the Indian Private Equity and Venture Capital Association (IVCA) — a body representing venture capital and private equity firms in the country — have also been holding discussions internally to tackle the angel tax issue.
Overseas investors typically use complex corporate structures with offshore entities based in jurisdictions like Singapore, Mauritius, etc., to avoid attracting tax on their investments in India.
"The industry is spending time to analyse and understand why such jurisdictions were left out. The industry would like to explore self-suggested safeguards to ensure that genuine funds should not be affected, while those who are flouting the rules are tackled," said Siddarth Pai, founding partner of 3one4 Capital and co-chair of IVCA’s regulatory affairs comittee. "Investors from such jurisdictions (Singapore, Mauritius, etc.) are seeking regulatory clarity on the path forward,” he added.
Following the notification of the new rules last week, investors said they were worried about the move hurting the inflow of capital into the country, encouraging flipping of companies outside India and adding an irrational compliance burden on startups.
ET previously reported that Mauritius, Singapore, the Netherlands and the Cayman Islands were among the top 10 jurisdictions to route foreign direct investment into India.
According to data sourced from the Department for Promotion and Industry and Internal Trade, FDI inflows during April-December 2022 totalled $13.08 billion from Singapore and $4.73 billion from Mauritius. The FDI inflows include the amount invested in securities that do not attract the angel tax.
Almost 90% of the capital invested in Indian startups is from vehicles in Singapore and Mauritius. The new angel tax rule brings several global funds under the tax ambit.
Bad timing, growth worries
The government’s decision to impose angel tax on jurisdictions such as Mauritius, Singapore, the Cayman Islands and the Netherlands comes at a time when funding taps have dried for Indian startups, amid worsening of macroeconomic conditions globally.
“Current funding climate is slow and selective. Regulatory changes at this juncture may add complexities to the compliance and documentation aspects of a funding transaction and may further slowdown the process,” said a third executive at a venture capital firm. “A simpler and inclusive approach will send the right signals to investors. The startup ecosystem in India needs growth capital and overseas fund inflow has been a key source.”
The executive said the current notification with exemption for only a few selected jurisdictions will “certainly be limiting the options for startups”.
Aggregate venture funding fell to $2.19 billion during January-March 2023 from $11.34 billion in the same quarter last year, according to data sourced from research firm Venture Intelligence.
[The Economic Times]
