In contrast to the common anticipation that domestic investors would be given a level playing field by eliminating the “Angel tax,” an unanticipated move to bring transactions involving non-resident investors into the tax net has been proposed to achieve parity.
If we conducted a survey on the most frequently cited responses by tax professionals to the Finance Minister’s Union Budget Speech each year, “the devil is in the details” would undoubtedly rank highly. While this year’s budget appears to be well-balanced despite walking a tightrope between continuing an economic stimulus through capex spending and fiscal prudence, we discovered the inevitable devil in the proposed amendment to the so-called ‘Angel tax’ provisions after reading the fine print of the tax proposals.
The considered income regulations (under Section 56(2)(viib) of the Income-tax Act, 1961) require Indian corporations to tax any consideration received on the issue of shares with a share premium above the fair value of the shares (as per prescribed tax rules). Currently, the regulations can only apply to Indian enterprises that raise funds from resident investors. However, the budget suggests that their applicability be evaluated regardless of whether the investor is a resident or non-resident. The requirements were introduced as anti-abuse regulations intended to prevent money laundering schemes. Some types of investors, including venture capital funds, alternative investment funds, and non-resident investors, were excluded on purpose from the testing of these laws. In addition, Government companies, listed corporations and their subsidiaries, as well as certain qualifying startups, are not subject to these restrictions.
There have been repeated requests to abolish this tax since it incentivizes the tax collector to pass commercial judgement on subjects governed by fluid market forces. Even when such prices were regularly adopted by a group of investors, including non-resident investors, tax authorities have questioned corporations on valuations used in a fund-raise from resident investors. Contrary to the common anticipation that domestic investors would be given a fair playing field through the elimination of the “Angel tax,” a parity has been proposed through an unanticipated proposal to tax transactions with non-resident investors. In fact, absent particular clarification from the government, the non-resident investment community would be worse off than resident investors, as regulated offshore corporations are not excluded from these regulations, unlike domestic AIFs.
