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Context

• Investors from 21 countries including the US, the UK, France, Australia, and Japan have been exempted from the levy of angel tax for investment in unlisted Indian startups.

ALL ABOUT ANGEL TAX: https://www.iasgyan.in/daily-current-affairs/angel-tax

What are the notified categories of exempted investors from angel tax?

• A press release was issued by CBDT on May 19, had detailed the classes of investors exempted from the angel tax provision.
• Central Board of Direct Taxes (CBDT) listed excluded entities which include those registered with SEBI as Category-I FPI, Endowment Funds, Pension Funds, and broad-based pooled investment vehicles where the number of investors in such vehicle or fund is more than 50, and the residents of 21 specified nations, including the US, UK, Australia, Germany and Spain.
• Other nations mentioned in the notification are Austria, Canada, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand and Sweden.
• The CBDT notification is effective from April 1, 2023.
• Other exempt entities include government and government-related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled by the government or where direct or indirect ownership of the government is 75 percent or more; and banks or entities involved in the insurance business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident.

What are the concerns regarding the exemptions? What do experts say on this?

• The exclusion of Mauritius, Singapore and Netherlands is being seen as a move to plug loopholes from investments arising from such tax havens.
• However, experts also see the exclusions of these countries having an impact on fundraising by startups as these form a major chunk of investment source for them.
• This relaxation is a welcome step to ease foreign investments. However, the exemption for broad-based fund is provided for 21 countries, which excludes top jurisdictions like Singapore, Mauritius and UAE. These three countries together constitute over 50% FDI in India.
• Not including Singapore, Mauritius and UAE, keeps almost all significant PE/VC funds and start-ups in which they invest, on their toes for angel tax issue. These funds contribute close to 50% of foreign investment in the country today

Concern

• Startup exemption for Angel Tax applies to less than 2% of DPIIT registered start-ups due to a long list of conditions they need to fulfill for a 7 year period, which makes it an exemption just on paper.
• Government spends a lot of time making policies after due consultation with the industry. However, the gap between policy intent and implementation needs to be bridged quickly, to catch up on the lost time and to seize the opportunity available to Indian entrepreneurs today.

Significance

• The government aims to attract more FDI into India from countries that have robust regulatory frameworks.
• This move aligns with the Government’s initial intention of bringing FDI under the purview of angel tax to prevent the circulation of unaccounted money. Therefore, exempting investments from regulated entities resident in countries with stringent and effective regulatory frameworks serves a logical purpose.

https://indianexpress.com/article/explained/explained-economics/new-angel-tax-tweaks-impact-start-up-fundraising-8630552/

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