CBDT vide Notification No. 29/2023 dated 24.05.2023 in S.O. 2274(E) notified the persons or class of persons from the applicability of provisions of section 56(2)(viib). With this, CBDT notifies 21 countries from where non-resident investment in unlisted Indian startups will be exempt from under section 56(2)(viib) and will not attract angel tax.
Section 56(2)(viib) provides that where an unlisted company receives any consideration from any person, whether resident or non-resident, for the issue of shares in excess of the fair market value of the shares then such excess amount shall be chargeable to tax under the head ‘Income from Other Sources’.
Finance Act, 2023 has amended the provisions of section 56(2)(viib) to enhance the scope of applicability of these provisions to make it applicable to the consideration received from non-residents also. Prior to the amendment, these provisions were applicable only if the consideration for the issue of shares is received from resident persons.
However, the proviso to this clause excludes where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund. Sub-clause (ii) to the said proviso empowers the Central Government to notify class or classes of persons to whom these provisions of ‘Angel Tax’ will not apply.
In exercise of the powers so conferred, CBDT has notified the following class or classes of persons from whom if an unlisted company receives any consideration for the issue of shares then the provisions of section 56(2)(viib) shall not apply-
(i) 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% or more;
(ii) Banks or Entities involved in Insurance Business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident;
(iii) Any of the following entities, which is a resident of any country or specified territory listed below, and such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident:–
(a) entities registered with the Securities and Exchange Board of India (SEBI) as Category-I Foreign Portfolio Investors;
(b) endowment funds associated with a university, hospitals or charities;
(c) pension funds created or established under the law of the foreign country or specified territory;
(d) Broad Based Pooled Investment Vehicle or fund where the number of investors in such vehicle or fund is more than fifty and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.
For this purpose, the board has notified 21 Countries/Specified Territories which are as follows-
In other words, if an unlisted company receives any consideration for the issue of shares in excess of the fair market value of the shares determined in accordance with notified Rule 11UA, then such excess shall not be chargeable to tax under the head ‘income from other sources’ and shall remain exempt from tax.
It is to be noted that countries such as Singapore, Ireland, Netherlands, Mauritius etc. from where the majority of FDI is channelised into India, do not find a mention in this notification and are excluded from the list of 21 countries mentioned above.
Similarly, vide Notification No. 30/2023 dated 24.05.2023 in S.O. 2275(E), the Board has carved out an exemption to an entity which is registered as a startup with DPIIT for any amount received as consideration for shares. Hence, Government-recognised startups would not be impacted by the changes in the provisions of section 56(2)(viib) with regard to the issuance of shares to foreign entities or overseas angel investors.
Companies or startups which are not recognised by DPIIT would be covered under the amendments to Section 56(2)(viib). It is called as angel tax since it impacts the investments made by angel investors in startup entities.
Read the full text of CBDT Notification No. 29/2023 dated 24.05.2023 on Notifying Persons exempt from Angel Tax
MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 24th of May, 2023
(INCOME-TAX)
S.O. 2274(E).—In exercise of the powers conferred by sub-clause (ii) of the first proviso to clause (viib) of sub-section (2) of Section 56, the Central Government hereby notifies the following class or classes of persons, for the purposes of the said clause, namely:-
(i) 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 seventy-five percent or more;
(ii) Banks or Entities involved in Insurance Business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident;
(iii) Any of the following entities, which is a resident of any country or specified territory listed in Annexure, and such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident :–
(a) entities registered with Securities and Exchange Board of India as Category-I Foreign Portfolio Investors;
(b) endowment funds associated with a university, hospitals or charities;
(c) pension funds created or established under the law of the foreign country or specified territory;
(d) Broad Based Pooled Investment Vehicle or fund where the number of investors in such vehicle or fund is more than fifty and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.
ANNEXURE
List of Countries
[Notification No. 29/2023/F. No. 370142/9/2023-TPL (Part-I)]
AMRIT PRITOM CHETIA, Under Secy. (Tax Policy and Legislation)
Download CBDT Notification No. 29/2023 dated 24.05.2023 on Notifying Persons exempt from Angel Tax in PDF format
Read the full text of CBDT Notification No. 30/2023 dated 24.05.2023 on Notifying Startups exempt from Angel Tax
MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 24th May, 2023
S.O. 2275(E).—In exercise of the powers conferred by clause (ii) of the first proviso to clause (viib) of sub-section (2) of section 56 of the Income-tax Act, 1961 (43 of 1961) and in supersession of the notificationof Government of India in the Ministry of Finance, Department of Revenue, Central Board of Direct Taxes published in the Gazette of India, Extraordinary, Part-II, Section 3, Sub-section (ii) vide number S.O. 1131(E) dated 5th March 2019, except as respect things done or omitted to be done before such supersession, the Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) ofsection 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the said consideration has been received from any person, by a company which fulfills the conditions specified in para 4 of the notification number G.S.R. 127(E), dated the 19th February, 2019 issued by the Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal Trade and published in the Gazette of India, Extraordinary,Part-II, section 3, Sub-Section (i) on 19th February, 2019 and files the declaration referred to in para 5 of the said notification of the Department for Promotion of Industry and Internal Trade.
2. This notification shall be deemed to have come into force from the 1 st day of April 2023.
[Notification No. 30/2023/F. No. 370142/9/2023-TPL (Part-I)]
AMRIT PRITOM CHETIA, Under Secy. (Tax Policy and Legislation)
Explanatory memorandum
It is certified that no person is being adversely affected by giving retrospective effect to this notification
Download CBDT Notification No. 30/2023 dated 24.05.2023 on Notifying Startups exempt from Angel Tax in PDF format
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