Indian government's efforts to ease angel tax hampered by restrictive provisions

The Indian government has announced amendments to the angel tax rules. With these changes, a whole host of investors from 21 countries have been exempted from paying angel tax.

These include banks and insurance entities, government, and related investors as well as any entity registered with the Securities and Exchange Board of India (SEBI) in Category 1 as foreign portfolio investors will also not attract angel tax.

The Central Board of Direct Taxes (CBDT) has now proposed changes to determine the fair market value and plans to introduce five additional valuation methods. The move is anticipated to provide clarity in reflecting the actual valuations of new-age companies and small businesses.

Speaking to CNBC-TV18, Sameer Gupta, national leader of tax at EY India highlighted that while the government has made an effort to introduce provisions for angel tax, the manner in which they have been laid out can be seen as cumbersome. However, he emphasised that the current provisions may be viewed as somewhat restrictive.

"While we are looking at startups, even for multinational corporations a lot of investments come from these jurisdictions where you have regional holding companies in Singapore, where money comes into India for capital expansion into the subsidiaries, and those will also to a lot of extent, stand affected. So, all in all, I do think that it has been a bit restrictive in which they have come out with the provisions."

He mentioned that individuals and organisations will need to reconsider their investment strategies and re-evaluate their valuation standpoint due to these changes.

Gupta further explained that the original intent behind introducing these provisions was to combat black money.

“The intent with which the provisions were introduced, was really around the whole black money angle, and getting investments from jurisdictions, which were not pedigreed jurisdictions.

To that extent, you know, excluding jurisdictions like Singapore, Mauritius, and Netherlands, that does seem to be a bit of a challenge and a bit of a struggle, because quite honestly, if you look at the flows of FDI, these countries do have significant investments coming into India.

So to that extent, we will have a challenge with respect to pedigreed investments from these very robust jurisdictions, and the flow of funds coming into India," Gupta added.