Opinion | How Will the Proposed Expansion of Angel Tax Methods Benefit Startups?

The basis of the angel tax is that the additional investment received by the startup is regarded as income. And so, as per Indian income tax rules, the Angel Tax Law, the startup must pay a tax if the investment made by an angel investor is done at a higher valuation than the fair market value (FMV).

Here are the features of angel tax norms:

The Fair Market Value: Determining fair value for startups can be a complex process, and there may not be a single universally accepted method for calculating it. This is true for early-stage startups that may not have a significant operating history or revenue, and where the value of the company may be more speculative.

Aimed to increase objectivity and standardisation in valuing startups, the proposed valuation process accepts that there may not be a perfect or error-free way to determine fair value. The proposed guidelines could help in preventing abuses and promoting a level playing field for all investors by offering a more organized framework for figuring out the fair market value of shares.

Proposed Expansion of Valuation Methods: Under the proposed expansion, startups will have the opportunity to determine their valuation through alternative methods such as discounted cash flow analysis, net asset value, or other acceptable methods. This shift will provide a fairer and more accurate assessment of the startup’s worth, reducing the tax liability associated with the angel investment.

In the case of non-resident investors, the proposed expansion of valuation changes in angel tax methods introduces additional valuation methods to determine the fair market value of startups. These alternative methods aim to provide a more accurate assessment of the startup’s worth and reduce the tax liability associated with angel investments.

In other words, the expansion seeks to adopt more flexible and realistic valuation methods, taking into account the unique nature of startups and their potential for growth.

Here’s how the proposed expansion of valuation in angel tax methods could help startups grow.

Growth Opportunities

1. Investments: The proposed expansion would provide a more accurate representation of a startup’s value and will be less complex with a standardised and objective framework making it more attractive to potential investors. This increased investment would fuel the growth and development of startups, allowing them to scale their operations and bring innovative products and services to market.
2. Encouraging entrepreneurs: Reducing the burden of angel tax through an expanded valuation methodology can encourage more entrepreneurs to launch startups. This, in turn, will lead to an increase in economic growth, job creation, and innovation. Angel tax reduction can also help reduce inequality by allowing entrepreneurs to access more capital and resources.
3. Promoting innovation and entrepreneurship: By reducing the angel tax burden, the proposed expansion of valuation changes will create a more favorable environment for entrepreneurial ventures fostering innovation and unique ideas It will also encourage more investors to invest in such ventures. This will ultimately help to stimulate the economy and create a larger market for goods and services, boosting overall economic prosperity.

CBDT Announcement On Angel Tax

Recently, as per the new announcement by the Central Board of Direct Taxes (CBDT) on angel tax regulations, the proposed adjustments provide flexibility to certain types of investor category including pension funds, sovereign wealth funds, and central banks from 21 countries. The finance minister has informed these countries, including the US, the UK, and France, that non-resident investment in unlisted Indian companies will be exempt from angel tax. Singapore, the Netherlands, and Mauritius are not included on this list. While foreign investments in DPIIT-registered firms are also exempted from the same.

Conclusion

Financial authorities are making changes to give startups flexibility in managing their funds effectively; these changes help them comply with relevant rules and regulations and promote the growth of the startup by increasing accessible business encouragement. These changes also provide a level-playing field to startups, allowing them to compete with established companies. Furthermore, the support provided by financial authorities helps in reducing the risk associated with running a startup.

The writer is Chief Investment Officer for Investment Banking at Swastika Investmart Ltd. Views expressed are personal.