Angel Tax Explained: Exemptions, Rule 11UA Amendments and Impact of Section 56(2)(viib) Omission



Quick Summary
India has omitted Section 56(2)(viib), known as the 'Angel Tax' provision, significantly altering its taxation of share premiums. However, recent notifications provide retrospective exemptions from April 1, 2023, for certain foreign investors like Category I FPIs and DPIIT-recognised startups. Amendments to Rule 11UA also introduce new valuation methods and a safe harbour threshold for non-resident investments, aiming for greater flexibility and certainty. It's important to note that investments from foreign corporate entities not covered by these exemptions still fall under the old rules for past periods.

Overview The omission of Section 56(2)(viib), commonly known as the "Angel Tax" provision, marks a significant shift in India's taxation framework for share premiums received by companies. However, understanding the legal and regulatory developments surrounding this provision remains important, par
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Angel Tax, under Section 56(2)(viib), was a provision in India's tax law that taxed share premiums received by companies from investors at a rate higher than the fair market value of the shares.

Section 56(2)(viib), the 'Angel Tax' provision, has been omitted. However, understanding its implications for past assessment years remains important.

Retrospectively from April 1, 2023, certain foreign investors, including Category I FPIs, Endowment Funds, Pension Funds, and eligible pooled investment vehicles from 21 specified nations, are exempt. DPIIT-recognised startups are also exempt if they meet specific conditions and file a self-declaration.

Amendments to Rule 11UA propose five additional valuation methodologies for non-resident investments and introduce a 10% safe harbour threshold. This means if the share issue price is within 10% of the fair market value determined by Rule 11UA, it will be considered the fair market value.

No, specific categories of foreign investors and DPIIT-recognised startups are now exempt. However, investments from foreign corporate entities that do not qualify for these exemptions may still be subject to the provisions for past periods.




About the Author

DESIGNATED PARTNER

Mr. Vivek Jalan is a FCA, Qualified LL.M (Constitutional Law) and LL.B. He is the Chairman of The Fiscal Affairs and Taxation Committee of The Bengal Chamber of Commerce and Industry. He is the Convenor on Indirect Taxes of the CII- Economic Affairs and Taxation Committee (ER); He is also a visiting faculty for Indirec ... Read more

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