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Budget 2023: Angel tax on share consideration received from non-resident investors

20 Feb 2023

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In a proposed amendment likely to complicate the process of fundraising from foreign investors and conversion of convertible instruments, the Finance Bill, 2023 proposes to cover non-resident investors within the ambit of Section 56(2)(viib) (commonly referred to as the 'angel tax' provision) of the (Indian) Income Tax Act, 1961.
Partner: Himanshu Sinha, Counsel: Aditi Goyal


The angel tax provision was originally introduced by the Finance Act, 2012, ostensibly to deter the generation and use of unaccounted money. Under the provision, the excess of the consideration received by a privately-held company (PLC) for the issue of shares, over the fair market value (FMV) of the shares, is deemed to be the income of the PLC. Such income is taxed at the corporate tax rate applicable to the PLC.

Proposal under the Finance Bill, 2023

The Finance Bill, 2023 (Bill) proposes to apply the angel tax provision to excess consideration received by a PLC on the issue of shares to non-resident shareholders as well. The amendment will apply with effect from financial year 2023-24. Given that the provision in its current form contains limited exceptions (with the exemption accorded to notified start-ups being subject to restrictive conditions), the proposal, if enacted, may adversely impact PLCs seeking to raise capital at a premium from non-resident investors.

Impact on the issuance of shares

Interestingly, the (Indian) Income Tax Act, 1961 (ITA) also contains a deemed income provision in Section 56(2)(x) (deemed income provision) , in terms of which if the acquirer of certain kinds of property (including securities) receives such property for a consideration lower than the FMV computed in the prescribed manner, the excess of the FMV over the consideration is taxed in the hands of the acquirer. The position of the tax authorities is that the deemed income provision applies to shares acquired through a primary issuance as well.

This in itself may not be a significant concern, given that the valuation rules prescribed under both provisions are different, and leave some leeway for a tax-compliant share issuance that does not result in adverse consequences for the PLC or the investors. To elaborate, under the angel tax provision, the FMV of equity shares may be computed by employing a Net Asset Value (NAV) based method or the Discounted Cash Flow (DCF) method at the option of the taxpayer (i.e., the PLC issuing the shares). On the other hand, under the deemed income provision, the FMV of equity shares must be computed by employing a NAV based method only. For a going concern issuing shares, the DCF value usually exceeds the NAV based value. Given this, PLC issuing equity shares usually opt for the DCF method for the purposes of the angel tax provision. In such a scenario, equity shares issued at a value above the NAV and below the DCF value meet the requirements of both provisions, and do not result in any adverse tax implications for the PLC issuing the shares or the investors.

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