The investor community, which has been playing a key role in keeping start-ups and SMEs alive during the pandemic and until now, seems to be peeved by the Finance Ministry’s decision to introduce an Angel Tax in April this year.
V Balakrishnan, Chairman of Exfinity Ventures & Former CFO of Infosys told The Hindu, “This is an unnecessary move when start-ups are already facing a funding winter with a challenging economic environment globally.’‘
However, the government stated that it would address the concerns of the industry when they formulate the rules next month. “We have to wait and see,” Mr. Balakrishnan added.
“This is raising a lot of concerns in the [investor] ecosystem since most companies will not have the cash in hand to pay this tax bill. Also, investments from Angels are likely to get significantly impacted as non-residents are an increasing source of Angel venture investments,’‘ observed Ankita Vashistha, CEO and managing partner, StrongHer Ventures, a fund exclusively focused on women.
According to Ms. Vashistha, the Angel Tax is being levied on start-ups at 30.9% on net investments in excess of fair market value. “And many start-ups may retrospectively be assessed for this tax, years after their fundraising,’‘ she expressed concerns.
Siddarth Pai, Founding Partner 3one4 Capital & co-chair, Regulations Affairs Committee, Indian Venture and Alternate Capital Association (IVCA) commented, “With the passing of the Finance Bill, 2023 – the applicability of angel tax on foreign investors has been cemented.’‘
The only two classes of investors whose investments are exempt from the Angel Tax are SEBI-registered CAT-I and -II AIFs as well as IFSCA-registered CAT-I and -II AIFs (under the IFSCA FME Regulations, 2022).
There was confusion about whether [the tax] goes live on April 1, 2024, or April 1, 2023. But the memorandum to the Finance Bill 2023 clearly states that it applies from Assessment Year 2024-25, which is Financial Year 2023-24. April 1, 2024, in the Finance Act refers to the Assessment year, not financial year.
“The start-up ecosystem still holds hope for exemptions to international institutional investors like VC funds, sovereign wealth funds, etc. The Centre is empowered to do so via notification. The hope is that the notification comes before April 1, 2023, so that ongoing funding rounds aren’t dislocated,’‘ Mr. Pai anticipated.
