Mauritius and Singapore — two leading sources of foreign investment — have been kept out from a list of 21 countries from where non-resident investments in unlisted Indian start-ups will not attract angel tax.

The move is expected to dash the hopes of non-resident private equity players and venture capital investors who were expecting relief.

The government announced last week that certain categories of institutional investors such as central banks, sovereign wealth funds, multilateral organisations, insurance companies, pension funds and foreign portfolio investors and broad-based pooled investment vehicles where the number of investors is more than 50 (non-hedge funds) would be excluded from the ambit of angel tax.

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

The list covers 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.

Mauritius and Singapore are the top two countries in terms of foreign direct equity inflows and among the top five in foreign portfolio investments.

Market analysts on Thursday said the government seems to be averse to extending any benefits to institutional investors from tax haven countries such as Luxembourg and Mauritius and low-tax countries such as Singapore.

Global institutional and individual investors exploit low-tax jurisdictions to invest in non-listed start-ups in India and other counties in the Asia Pacific for tax arbitrage benefits. Even many Indian venture capitalists are registered in these jurisdictions.

Analysts expect follow-up notifications from the tax authorities about these missing jurisdictions.

"This notification issued by the CBDT exempting certain categories of investors from the provisions of Section 56(2) (viib) is a welcome step. However, these benefits may not be available to several large private equity funds who invest in India through jurisdictions such as Mauritius and Singapore," said Punit Shah, partner, Dhruva Advisors.

"Also, broad-based funds are defined as having more than 50 investors. Hence it would be interesting to see whether the benefit is extended to such pooling vehicles making investments in India through SPVs located in non-specified jurisdictions," Shah said.

"The exclusion of Singapore and Mauritius is certainly a surprise, but perhaps an interim mitigation technique by the authorities. These jurisdictions are one of the major sources of capital inflow into Indian start-ups, which also means that they might need to be dealt with separately and on different terms than the current set of exempted countries, to balance tax revenue and capital inflows. To be noted, several so-called Indian VCs are also registered in these jurisdictions," said Shauraya Bhutani, co-founder of Capital Connect Advisors, in response to a query from The Telegraph.

"I expect to see follow-up notification shortly regarding these jurisdictions. But until then, the capital inflow tap for Indian start-ups is open again, just not with the same pressure," said Bhutani.

According to a KPMG report, venture financing in India during the first quarter of calendar year 2023 fell 77.5 per cent to $21. billion from $9.3 billion a year ago.

The CBDT is expected to come out with valuation guidelines.