The Centre is taking a re-look at the Budget 2023-24 decision of imposing angel tax on foreign or non-resident investments in unlisted companies starting next fiscal, following concerns raised by the industry on the calculation of fair market value of shares for arriving at the taxable amount and seeking parity with international methods, said senior officials. 

“The Department for Promotion of Industry and Internal Trade (DPIIT) will take up the concerns of unregistered start-ups and other companies with the Finance Ministry regarding the discrepancy pertaining to the calculation of fair market value under angel tax provisions,” said a person aware of the matter.

Angel tax is the tax (income tax of 30.6 per cent) charged when an unlisted company issues shares to an investor at a price that is more than its fair market value. Earlier, it was imposed only on investments made by a resident investor, but Budget 2023-24 proposed to extend angel tax to even non-resident investors from April 1, 2024 .

“The decision is likely to affect startups, although the ones registered with DPIIT are likely to be exempted, as many depend a lot on foreign funds, especially during the initial stage. It could hurt startups especially at a time when they are already staring at a funding crunch,” said an industry source.

Also read: Angel tax is draconian and unfair on start-ups 

The industry’s chief concern is that calculating a startups’s fair market value could have subjective aspects and involve issues such as determination of future performance and many suggest that an understanding reached between the company and the investor could be the best parameter. 

The industry says that there is a discrepancy between the method used in India to calculate fair market value and many international methods which needs to be removed, the official said. Some have also sought exemption for international institutional investors like venture capital funds. 

Also read: Decoding the angel tax muddle

“The DPIIT is trying to get industry representatives on the discussion table with officials from the Department of Revenue and the Department of Economic Affairs, tell them there is a discrepancy, and ask them to find a solution,” said the official.