India notifies new angel tax rules for fair market value of startups

The Indian government on Monday notified new angel tax rules that comprise the mechanism to evaluate the shares issued by unlisted startups to investors.

Through its budget for 2023-24, the government had proposed to include foreign investment under the ambit of the angel tax, which is essentially the tax levied upon capital received on the sale of shares of a startup above the fair market value. The government had said the excess premium will be considered as “income from sources” and face taxes up to over 30%. Earlier, this tax was only applicable only on local investors.

Startups registered with the Department of Promotion of Industry and Internal Trade (DPIIT), however, have been exempted from the new norms. The government highlighted that the exemption will benefit over 80,000 startups.

That said, the new angel tax comes into effect from September 25 as part of the Rule 11UA of Income Tax rules.

As mentioned above, the new rules also come with a mechanism to determine valuation. The fair market value can be calculated on the basis of any of the following methods - comparable company multiple method, probability weighted under expected return, option pricing, milestone analysis, and replacement cost. You can read the government notification here.

The move however has drawn a sharp reaction from the investors, founders, and other stakeholders, who see it as detrimental to the Indian startup ecosystem. The backlash has also been there because it came at a time when the startup industry is reeling under the so-called funding winter. Indian startups, especially late-age startups, are finding it difficult with getting large rounds.

India saw its first unicorn of 2023 in August after a gap of 11 months when quick commerce platform Zepto raked in $200 million in its Series E round to enter the $1 billion valuation club. However, the overall fund inflow remained below the $500 million mark in the last month despite the single round of $200 million.

Data compiled by Fintrackr shows that 64 startups announced their fundraise worth $464 million in August. This included 6 growth and late stage deals worth $351 million and 58 early stage deals worth $112 million. Early stage deals also count 12 undisclosed rounds.

This is a negligible jump in amount when 80 startups raised around $461 million in July. This year, the decline started in June when fund inflow fell from $1 billion to $631 million. This is the second time startups saw funding less than $500 million in a month since January 2021.