More number of domestic startups may now start housing their operations within Gujarat International Finance Tec (GIFT) City, rather than their historical preference for locations like Mauritius and Singapore. According to venture capitalists and legal experts, such a move will come about as a result of the government’s recent notification, which has not exempted investments from countries like Singapore, the Netherlands, Mauritius and UAE from the angel tax levy. Foreign capital inflow into Indian startups has been growing from these countries in recent times.
The government has, however, exempted foreign funding from 21 countries, including the US, UK and France from the tax levy. Rajeev Suri, managing partner, Orios Venture Partners said that the new notification will benefit the government in multiple ways, including in the form of forex flows and in widening the income tax net.
“We believe this (exemption of a few countries) expresses the government’s intent to promote Gift City as the preferred means to receive foreign funds into India, by explicitly discouraging funds from jurisdictions like Mauritius and Singapore. These countries are preferred locations historically for structuring feeder funds, because of multiple reasons, including attractive tax rates and light KYC norms,” Suri said.
Legal experts also indicated that the explicit exclusion of countries like Singapore, the Netherlands, Mauritius and UAE, from the list may also force foreign investors to adjust valuations to avoid tax, despite having legitimate reasons for a valuation premium.
Armaan Patkar, partner, Argus Partners said that investors from countries such as Singapore and Mauritius may also be forced to seek relief from additional capital gains via India’s existing Double Taxation Avoidance Agreement (DTAA) agreement. The DTAA is an agreement that India had earlier signed with multiple countries to help foreign investors avoid being taxed twice on the same income.
The notification by the Central Board of Direct Taxes also excluded certain classes of investors from the ambit of the angel tax levy. These includes VC funds registered with Sebi as Category-I FPI, Endowment Funds, Pension Funds and broad-based pooled investment vehicles, which are residents of 21 specified nations, including the US, UK, Australia, Germany, Spain, and others.
The angel tax which is applicable to startups is essentially a tax levied on the capital raised by a company and was introduced originally in the 2012 Budget. Until the 2023 Budget, the tax was applicable only to domestic individual investors. However, in the 2023 Budget, both foreign investors and NRI investors were also brought under the ambit of the angel tax.
The angel tax is levied on the differential amount between the fair market value (FMV) of the shares and the consideration received by the company, resulting in startups paying a tax on the premium received from angel investors. The tax had earlier resulted in many startups being penalised, even when they have not made any profits, making it a significant challenge for early-stage startups to raise capital.
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