Officials said talks were ongoing with the departments of revenue and economic affairs to address the concerns, as startups raise funds based on their market valuation but that also increases their tax liability. “We are talking to the revenue department and the department of economic affairs. Talks are ongoing,” said an official.
Startups are valued at a price higher than the fair market value (FMV) as their investors look at liquidation preferences and other balancing rights.
This discussion comes amid declining investment for startups, especially after the collapse of California-based Silicon Valley Bank, which was crucial to the startup ecosystem.
As per the latest ‘Tracxn Geo Quarterly Report: India Tech – Q1 2023’ report, the startup ecosystem in India saw a considerable decline in investment in the first quarter of 2023 compared with the same period in 2018.
In the budget 2023-24, the government proposed to include foreign investors under the ambit of the angel tax that was applicable to Indian residents. It will become effective April 1, 2024. Angel tax is levied on unlisted companies when they issue shares at a price that exceeds the FMV. The difference is then taxed at 20% or more.
Besides being an additional burden from a regulatory perspective, startups fear that the move will push investors away.
