India proposes changes to tax on angel investors in unlisted firms

NEW DELHI (Reuters) -The Indian government on Friday proposed changes to the tax imposed on angel investors in unlisted entities, exempting a number of categories of foreign investors from such levies.

Investments in Indian unlisted firms by central banks, sovereign wealth funds, entities controlled by the government with direct or indirect ownership of 75% or more, among others, would be exempt from so called “angel tax” provisions, the federal finance ministry said in a statement.

Angel tax is a commonly used term for tax imposed when shares of an unlisted entity are issued to an investor at a price more than its fair market value. This tax was earlier imposed on Indian resident investors, but was to be extended to non-resident investors starting April 1, 2024.

Category-I foreign portfolio investors registered with the Securities and Exchange Board of India, endowment and pension funds, banks and insurance companies incorporated in India, and pooled investment vehicles with over 50 investors, will also be exempt from the provisions.

The government has also expanded the valuation methodologies that can be used to calculate the gains. Five valuation methods can be used to value shares of an unlisted firm.

To ensure parity in investments by both resident and non-resident investors, price of shares would be referenced to investments by venture capital funds, the statement said.

A 10% variation in value of shares has been provided to account for foreign exchange fluctuations and variation in economic indicators that may affect share valuation during multiple rounds of investments.

(Reporting by Nikunj Ohri and Ira Dugal; Editing by Louise Heavens and Shounak Dasgupta)