startups in india: No angel tax on past foreign investments in startups


India will provide grandfathering to past investments by non-residents in startups and the proposed changes to the angel tax provision were prospective said Central Board of Direct Taxes (CBDT) chairman Nitin Gupta in an interview to ET. He said past investments will be grandfathered unless there was some incriminating information.

“The provision would apply prospectively,” he said.

The government has proposed to amend the so-called angel tax provision or the Section 56(2) (viib) of the income tax act in the budget. The provision states that any premium paid by an investor in excess of the fair market value (FMV) of the shares of an unlisted company is taxable in the hands of the company at a rate of 20% or above. The government has now proposed to bring foreign investors under the ambit of the angel tax which hitherto applied to Indian residents and funds not registered as Alternative Investment Funds (AIFs).

The start up ecosystem that sees foreign investment as a major source of funding has expressed concerns about the proposed change.
Gupta, however, said startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) will not be covered under the provision.

The proposed amendment will be effective from April 1, 2023, according to the finance bill.

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Startups are also concerned about the tax authorities questioning foreign investments made prior to 2024.”There are already enough safeguards (preventing an assessing officer from any arbitrary reopening of cases), but if you are doing something unwarranted and the incriminating evidence comes on record which suggests something wrongdoing, then no one would support that,” Gupta cautioned.

On new tax regime
Gupta exuded confidence of more than half of taxpayers adopting the new tax regime with the latest changes proposed in the budget.

“I expect at least 50% to two third of the taxpayers to shift to the new tax regime because of the benefits offered,” Gupta said. The new tax regime, he said, is simple for both taxpayers as well as the tax department.

“There are lesser chances of evasion or making wrong claims, which at times taxpayers make,” Gupta said, adding that the department is nudging people to adopt this.

The budget proposes to increase the rebate limit to ?7 lakh in the new tax regime, while raising the exemption limit to ?3 lakh and reducing slabs to five from six.

Asked about the response from the corporate sector to the exemption-less regime, Gupta said over 20% companies had adopted it. But these 20% companies account for 61% of the income offered under tax.

He said in the case of companies, some sitting on carry forward losses or minimum alternate tax have not taken up the new regime.

Gupta said the board had undertaken several initiatives to improve ease of tax filing.

Asked about the response to the updated return facility that was brought in the last budget, he said the department had collected ?720 crore in tax. On collection from levy of tax deducted at source on cryptocurrency, he said about Rs 1000 crore had been collected.

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