Widely referred to as the angel tax provision, the Finance Bill, 2023, has sought to address a gap that exists in Section 56(2)(viib) of the income tax law.
The provision says that when a privately held company issues shares at a particular price that is greater than fair market value, tax is charged to the amount received in excess of FMV.
It was introduced back in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the FMV of the company's shares.
As of today, this provision is applicable if shares are issued to a resident Indian.
The Finance Bill, 2023, has now proposed that the provision should be extended to non-residents as well.
This proposed amendment would mean that even Foreign Direct Investment could be taxed via this section, Amit Maheshwari, partner at AKM Global, told BQ Prime.
Under FEMA, valuation norms prescribe the minimum floor for the purposes of bringing in FDI. Income-tax department would seek to tax any premium above the fair value. One can expect tax department to start examining FDI in startups which will result in litigation going forward.Amit Maheshwari, Partner, AKM Global
However, startups registered with the Department for Promotion of Industry and Internal Trade would obviously not be hit by this, Maheshwari said.
Each foreign investment in an unlisted company will need to be justified for fair value, Girish Vanvari, founder of consultancy firm Transaction Square, pointed out. "Expect lots of debate and litigation at the fair," he said.
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