In a significant move aimed at promoting investment and fostering growth in the startup ecosystem, the Central Board of Direct Taxes (CBDT) has issued a notification declaring that investments in startups from 21 specified nations will be exempt from angel tax. This decision comes as a relief for non-resident investors and is expected to encourage foreign investment in Indian startups.
The Finance Ministry has notified 21 countries, including the United States, United Kingdom, and France, from where non-resident investment in unlisted Indian startups will no longer attract angel tax. The list, however, does not include countries such as Singapore, Netherlands, and Mauritius. This step is part of the government’s efforts to ease regulatory burdens and create a favorable environment for startups.
Previously, in the Union Budget, overseas investments in unlisted closely held companies, excluding startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT), were brought under the purview of angel tax. This move had raised concerns within the startup and venture capital industry, prompting them to seek exemptions for specific categories of overseas investors.
The CBDT’s recent notification, issued on May 24, provides clarity by identifying classes of investors who will be exempt from the Angel Tax provision. The excluded entities include those registered with the Securities and Exchange Board of India (SEBI) as Category-I Foreign Portfolio Investors (FPIs), Endowment Funds, Pension Funds, and broad-based pooled investment vehicles. These exemptions apply to residents of the 21 specified nations, which include the United States, United Kingdom, Australia, Germany, and Spain, among others.
The notification further specifies that investors from Austria, Canada, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand, and Sweden will also be eligible for the angel tax exemption.
Angel tax has been a contentious issue in the Indian startup ecosystem, with concerns raised about its impact on early-stage investments. This tax was initially introduced to curb money laundering through unlisted companies by taxing the capital raised at a premium. However, it often affected genuine investments made in startups, causing administrative and financial burdens.
The exemption of angel tax for investments from the specified nations is expected to boost foreign direct investment (FDI) and encourage more global investors to participate in India’s startup growth story. It will provide relief to startups and investors alike, facilitating smoother fundraising processes and fostering a favorable investment climate.
The CBDT’s move aligns with the government’s larger agenda of supporting entrepreneurship and innovation. By removing regulatory barriers and providing tax incentives, the aim is to nurture the startup ecosystem and position India as a hub for innovation and technology-driven enterprises.
The notification by CBDT is seen as a positive step towards addressing the concerns of the startup community and attracting foreign investments. It reflects the government’s commitment to creating an enabling environment for startups to thrive and contribute to the country’s economic growth.
The inclusion of countries like the United States, United Kingdom, and Germany in the list of exempted nations is particularly noteworthy. These nations are known for their strong venture capital networks and robust startup ecosystems. By exempting investments from these countries from angel tax, the government aims to tap into their expertise, experience, and capital to foster the growth of Indian startups.
As the startup landscape continues to evolve, it is essential for policymakers to adopt a dynamic approach and introduce measures that encourage innovation and investment. The angel tax exemption for investments from 21 nations is a significant stride in the right direction, demonstrating the government’s responsiveness to the needs and aspirations of the startup ecosystem.
Overall, this development is expected to provide a much-needed boost to the startup sector, fostering increased investment, job creation, and technological advancements. It will also contribute to India’s journey towards becoming a global startup hub, attracting talent and capital from around the world.
