India (Common Wealth) _ If they raise additional equity money, US multinational corporations, British firms, and major French industrial groups with closely held businesses in India will be subject to so-called angel tax scrutiny. Numerous organizations, including pension plans and sovereign wealth funds from 21 different countries that invest in India were given a broad exemption from the angel tax by the government, but corporate entities were not included and might potentially be subject to the charge.
Foreign direct investment (FDI), which decreased 16% in FY23 after several years of strong expansion, may suffer unforeseen effects as a result of this, according to analysts.
Several hundred multinational corporations (MNCs) received letters from the Indian income tax authorities in March demanding them to explain the source and valuation of their Indian armed forces that received funding in FY19. According to analysts, these tax inquiries would increase as a result of the most recent modification in the tax law and the lack of a particular carve out for corporate foreign investment in unlisted companies, which would undermine the convenience of doing business.
According to Sudhir Kapadia, partner at EY, “One unintended consequence of this amendment is that a parent MNC investing in its subsidiaries in India would also be subject to angel tax provisions.” “This aspect needs to be addressed post haste at a time when India is working to attract more FDI.”
Senior government officials downplayed the worries and called them “unfounded fears.”
If a closely held firm issues shares at a price above fair market value, calculated using the authorized methodology, the difference is to be taxed as income from other sources under Section 56(2)(vii)(b) of the Income Tax Act. The tax is known as the “angel tax” since it significantly affects angel investments. The government expanded the scope of Section 56(2)(vii) in the February budget, as opposed to the former, more restrictive provision that solely applied to non-resident Indians. The goal of the legislation is to stop money laundering by using exaggerated appraisals.
When investing in unlisted Indian subsidiaries, foreign parents from white-listed countries who are not defined entities are reassessing their tax risks since they are unsure of whether the value of the Indian firm under the laws will be favorable to them be deemed acceptable by the Indian authorities or subject to scrutiny, according to Amit Agarwal, the partner at Nangia & Co LLP.
Foreign central banks, pension funds, sovereign wealth funds, and endowment funds from 21 different countries are immune from the angel tax charge, according to a notification released on Thursday by the Central Board of Direct Taxes (CBDT). Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, South Korea, New Zealand, Norway, Russia, Spain, Sweden, the United Kingdom, and the United States make up these 21 nations.
Regarding the tax status of corporate structures, the announcement was mute. Singapore, Luxembourg, and Mauritius investors were not allowed.
