Is the Government Pushing More VCs to Set Up Funds in India's GIFT City?The Central Board of Direct Taxes (CBDT) announced a list of 21 source countries that will not be subject to the angel tax provisions on Wednesday. The list did not include nations like Singapore and Mauritius, which have established themselves as preferred jurisdictions for investments in India.

In a notification on Wednesday, the Central Board of Direct Taxes (CBDT) announced a list of 21 source countries that will be outside the angel tax provisions.

Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Korea, New Zealand, Norway, Russia, Spain, Sweden, the United Kingdom, and the United States are all included on the list.

However, this list makes no mention of countries like Singapore, Ireland, the Netherlands, and Mauritius, from where the majority of investment flows to India.

"India gets the highest FDI from these countries and the move to exclude them appears to be targeted towards pushing more VCs to set up funds in the IFSC GIFT City in India," according to Vaibhav Gupta, Partner, Dhruva Advisors.

"There are several tax benefits available for setting up funds in the GIFT City including a 10-year tax holiday as well as a tax-neutral migration of existing funds to the GIFT City. Funds set up in the IFSC are also exempted from the applicability of angel tax provisions similar to domestic AIFs. One can expect more traction on GIFT City as a consequence of this as well," Gupta said.

Just to remind you, the Gujarat International Finance Tec-city (GIFT) SEZ is the first International Financial Services Centre (IFSC) in India established under the Special Economic Zone Act, 2005 (the "SEZ Act 2005"). The Union Budget of 2016 included a competitive tax structure for the IFSC at GIFT SEZ, and it was put into force in April 2015.

It is being developed as a global financial services hub. It is the vision of the Hon'ble Prime Minister that GIFT IFSC would become a centre for activity related to international financial services. As a result, in just three years of operation, it has already hosted more than 125 financial entities that have been granted licences by the financial services regulators, RBI, SEBI, and IRDAI.

Investors raced to Singapore, Mauritius, and Cayman structures before GIFT City was established to make investments in India. Neeraj Tyagi, Co-founder and CEO of We Founder Circle claimed that the government's move to exclude these countries clearly indicates that they want to discourage the funds from setting up their base in these nations and instead use GIFT city as an alternate route to invest in Indian startups.

“近年来,很多全球基金和我ndians have set up funds and VCC structures in these countries to route the investment in Indian companies and so to encourage these entities to start looking at GIFT City option, this move will really help. In fact, a lot of Indians have now started setting up angel funds and VC funds in GIFT City, and We Founder Circle was one of the first few to apply for its Global Angel Fund in GIFT City for the same reason and today we feel fortunate to have been awarded the same," Tyagi said.

"While it may benefit the GIFT City, this decision may impact the fund flows towards India in the short term," Anshu Gupta, Partner–Investments at C4D Partners continued.

Data from the Department for Promotion and Industry and Internal Trade showed that FDI inflow from Singapore stood at $13.08 billion during April-December 2022, while Mauritius was $4.73 billion. The FDI inflow also includes the amount invested in securities that do not attract the angel tax.

The industry will now make an effort to get in touch with the government and the Central Board of Direct Taxes to find out if there are any additional safeguards that can be put in place to permit investments from Singapore and Mauritius to enter India without being subject to taxation under section 56(2)(viib), reports ET.

The CBDT recommended last Friday to exempt a variety of foreign investors from the angel tax, including sovereign wealth funds, pension funds, banks, and insurers. Additionally, it has published new valuation norms for those who fall under its purview.

Except for hedge funds, broad-based pooled investment vehicles and funds with more than 50 investors are free from tax.

"The broad-based funds are defined as having more than 50 investors. It will be interesting to see if this benefit is extended to such pooling vehicles making investments in India through specific SPVs located in non-specified jurisdictions," stated Punit Shah, Partner, Dhruva Advisors.

Additionally, the CBDT has stated that this tax will not apply to foreign investment in startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).

The CBDT has proposed to accept valuations by a merchant banker done within 90 days of a startup issuing shares.

In order to be exempt from the terms of the angel tax, a startup must meet a threshold of Rs 25 crore in paid-up capital and share premium in addition to registering with the DPIIT.