Angel tax exemption not available to portfolio investors from Mauritius, Singapore, Netherlands

New Delhi: The Central Board of Direct Taxes’ (CBDT) new rules on angel tax —taxation of share premium received by unlisted companies— does not cover private, non-banking entities such as portfolio investors from countries like Singapore, Mauritius and the Netherlands, showed an official notification.

As a result, these classes of investors from these popular jurisdictions will not get exemption from the controversial provision in Indian tax law introduced as an anti-evasion measure.

The tax authority, however, has listed 21 other countries including the UK, the US, Germany and Australia as jurisdictions portfolio investors from which are exempt from angel tax.  

Also, endowment funds associated with universities, hospitals or charities, pension funds and broad based pooled investment vehicles meeting certain conditions are exempt from angel tax.

CBDT order also showed that without any geographical restriction, government and government related investors like central banks, sovereign wealth funds, international or multilateral organizations or government controlled entities are exempt from angel tax.

As per Income Tax Act, share premium received by entities without substantial public interest are taxable as ‘income from other sources’. This provision was so far applicable to investments received from resident entities but in the Finance Act 2023, the government made this applicable to foreign investors too. The latest notification brings clarity and excludes specified investments from the purview of angel tax based on extensive industry consultation by the government.

Saurav Sood, Practice Leader- International Tax and Transfer Pricing at SW India said the list does not mention countries Singapore, Netherlands, or Luxembourg. «It seems to be a deliberate miss in spite of the fact that many investments come from these jurisdictions today through special purpose vehicles which invest indirectly into Indian start-ups., said Sood.

«While this notification has been a welcome relief to investors, it will have to be seen whether it meets the end fairly or is a goal half achieved,» said Sood.

Gouri Puri, Partner at law firm Shardul Amarchand Mangaldas & Co. said that non-inclusion of Singapore, Netherlands and Luxembourg is surprising considering that large number of investments are routed into India through these jurisdictions that are important financial centres. 

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