Budget 2023 proposal for Angel tax on non-resident investments is problematic

Income Tax

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Feb 14, 2023

If we ran a poll on the most oft-quoted reactions by tax professionals to the Finance Minister’s Union Budget Speech each year, the adage ‘the devil is in the detail’ is likely to figure high. While this year’s budget overall appears to be well-balanced though walking a tight rope between continuing an economic stimulus through capital expenditure spends and fiscal prudence, after going through the fine print of the tax proposals, we found the inevitable devil in the proposed amendment to the so-called ‘Angel tax’ provisions.

The deemed income provisions (under Section 56(2)(viib) of the Income-tax Act, 1961) require Indian companies to offer to tax, any consideration received on allotment of shares with share premium in excess of the fair value of the shares (as per prescribed tax rules). As they currently stand, the provisions can apply to Indian companies raising funds only from resident investors, but the budget proposes that their application should be tested irrespective of whether the investor is a resident or a non-resident. The provisions were introduced as anti-abuse rules that were meant to curb money laundering arrangements

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