Unlisted Startups In India, Singapore And Netherlands Subjected To Angel Tax

Investment in unlisted Indian start-ups from countries such as Mauritius, Singapore, and the Netherlands will be subject to angel tax.

The government has issued a list of "specified jurisdictions" that includes 21 countries, including the United States, the United Kingdom, Australia, and Germany, that will be exempt from the new tax.

However, countries such as Singapore, Ireland, the Netherlands, and Mauritius, from which the majority of investment flows to India, are absent from this list.

Global investors use investment vehicles in Mauritius and Singapore to enter India and invest in the unlisted space. According to experts, it is unclear whether specific special purpose vehicles (SPVs) located in non-specified countries will be exempt from the tax.  

"Some investors, such as category 1 foreign portfolio investors, pension funds, and broad-based investment funds, have received limited relief." Even such investors may need to reconsider setting up SPVs for investment in India rather than investing directly in order to qualify for angel tax exemption. It is surprising that Singapore, the Netherlands, and Luxembourg were not included, given that a large number of investments are routed to India through these important financial centres," said Gouri Puri, partner at Shardul Amarchand Mangaldas & Co.

According to industry estimates, Singapore, Mauritius, and the UAE account for more than half of all FDI in India; leaving them off the list would have a negative impact on the entire start-up industry.

Last Friday, the Central Board of Direct Taxes (CBDT) had proposed to exempt a host of foreign investors including sovereign wealth funds, pension funds, banks, and insurers from angel tax. It had also put out additional valuation norms for those that come within its net.