These could include funds qualifying as foreign portfolio investors (FPIs) and foreign venture capital investors (FVCIs) registered with the Securities and Exchange Board of India (Sebi), and entities registered with the Reserve Bank of India, a senior government official privy to the matter told Business Standard.

According to him, the revenue department will notify the regulatory framework, incorporating “a list of exempted entities” along with valuation rules for the newly introduced tax, by April 15.

“The move is intended to curb the circulation of illicit money as share premium and not to tax legitimate investment. Foreign entities registered with regulatory bodies are compliant with Indian laws, so those might be kept out of the tax,” the official cited above said. He added “we have been reviewing the concerns raised by industry and stakeholders and those will be addressed in the framework”.

The angel tax is on the amount received as more than fair market value as income in the hands of a company. Resident investors are within the purview of the angel tax. The government in the Finance Bill, 2023, proposed to omit the condition of residency under Section 56(2)(viib) of the Income-Tax Act, making it applicable even when shares are issued to non-resident investors.

Start-ups and venture capitalists, spooked by the tax made applicable to foreign investment, have approached the government, seeking exemption for certain classes of investors and some changes in the valuation methodology.

FPIs invest in listed companies and FVCIs only in large infrastructure firms. So their exposure to start-ups is minuscule, according to an industry estimate.

“Venture-capital funds that fuel the start-up ecosystem by investing billions of dollars are investment funds (not registered as FPIs or FVCIs) but most of the funds or their fund managers are closely regulated or supervised by financial services regulators in their home jurisdictions. The real support to the start-up ecosystem can be given only if these regulated private equity/venture capital funds (real angels) are exempt from the angel tax,” said Bhavin Shah, partner, PwC India.

Experts are of the opinion that existing GAAR (general anti-avoidance rules) provisions should be sufficient to take care of the government’s concern for unaccounted money dressing up as investment. And the tax will affect a majority of genuine investors for the wrongdoing of a handful.

“The government could consider other ways to carve out exceptions and ensure that legitimate private investors who want to invest at a higher price and bet on the India growth story should not be discouraged,” said Rajesh Gandhi, partner, Deloitte India.

Besides, valuation, which is the crux of tax applicability, needs to adopt a methodology common to the Foreign Exchange Management Act and the angel tax because doing so could provide a relief to investors who would otherwise have to struggle to find the right price that would meet the regulatory and commercial considerations, he said.

According to Gandhi, a safe-harbour range may be given because valuation can rarely be an exact science.

Some relaxation has been provided to promote foreign investment in start-ups. For instance, start-ups registered with the DPIIT are eligible for tax exemption.