The excess premium is considered ‘income from sources’ and taxed at a rate of up to more than 30%
New Delhi:
The Income Tax Department has announced new angel tax rules that include a mechanism to evaluate the shares issued by unlisted startups to investors.
While previously the angel tax – a tax levied on capital received on the sale of a startup’s shares above its fair market value – only applied to local investors, the budget for the 2023-2024 financial year (April 2023 to March 2024) extends its scope. absorb foreign investments.
According to the budget, the excess premium is considered ‘source income’ and taxed at a rate of up to 30 percent.
However, startups registered by the DPIIT are exempt from the new norms.
The Central Board of Direct Taxes (CBDT) has explained the valuation methodology in a notification dated September 25.
As per the amendments in Rule 11UA of IT Rules, the Central Board of Direct Taxes (CBDT) stipulates that the valuation of Compulsorily Convertible Preference Shares (CCPS) and shares issued by unlisted startups can be based on fair market value.
The amended rules also retain the five new valuation methods proposed in the draft rules for compensation received from non-residents: (i) Comparable Company Multiple Method, (ii) Probability Weighted Expected Return Method, (iii) Option Pricing Method, (iv) Milestone Analysis Method, and (v) Replacement Cost Method.
Deloitte India Partner Sumit Singhania said that from an investors’ perspective, the revised rules provide a wider range of valuation methodologies to work with, and this should make compliance less burdensome going forward.
“In addition, the safe harbor allowing a 10 percent deviation from fair value allows for valuation adjustments when necessary. Overall, the trajectory is aimed at aligning tax valuation methodologies with permissible exchange control standards,” Singhania said .
Nangia & Co LLP Partner Amit Agarwal said the amendments to Rule 11UA of the Indian Income Tax Act bring positive changes by providing flexibility to taxpayers through multiple valuation methods, simplifying the consideration of valuation date, encouraging venture capital investment, facilitating investments of registrants entities are facilitated and clarity is provided. on CCPS and encouraging foreign investment.
“Including a tolerance threshold for small valuation differences further increases efficiency and fairness in tax assessments, ultimately benefiting both taxpayers and the government.
“These changes provide taxpayers with a wider range of valuation methods to choose from, including internationally recognized approaches, attracting foreign investment and promoting clarity. In addition, the notified final rule introduces an additional sub-clause specifically related to CCPS,” Agarwal said.
SW India Managing Partner and co-founder Atul Puri said the CBDT has amended Rule 11UA to arrive at the fair market value of unlisted shares issued to resident and non-resident investors.
Rule 11UA currently prescribes two methods for valuing unquoted shares: the DCF (Discounted Cash Flow) method and the NAV (Net Asset Value) method for resident investors.
However, there was no specific reference to the valuation of shares issued to non-resident investors, and this would lead to confusion and litigation between tax officials and non-resident investors.
The amended Rule 11UA includes five additional valuation methods available as options for non-resident investors, in addition to the DCF and NAV methods. However, the option to value shares using any of these five methods is not available to resident investors.
“The amended Rule 11UA is a welcome move, which provides greater clarity to both the investor and the investor, based on which an appropriate valuation methodology can be adopted, thereby reducing the likelihood of future litigation and addressing illegal or spurious transactions while investments are promoted. in eligible startups,” said Puri.
AKM Global Tax Partner Amit Maheshwari said the new angel tax rules have very much taken care of an important aspect of the CCPS valuation mechanism, which was not the case earlier as most of the investments in India by VC funds are through the CCPS route only.
“The extension of the 10 percent safe harbor for CCPS investments, as it was earlier intended for equities, will provide a necessary safety margin to absorb currency fluctuations and is a welcome move,” Maheshwari added.
The CBDT had in May come up with draft rules on valuation of funding to unlisted and unrecognized startups for levying income tax, commonly called ‘Angel Tax’, and had sought public comments on the same.
The amended rules are intended to bridge the gap between the rules set forth in FEMA and the income tax.
Until now, only investments by domestic investors or residents in closely held companies or unlisted companies have been taxed above fair market value. This was commonly called an angel tax.
The Finance Act 2023 states that such investments will be taxed in addition to the FMV, regardless of whether the investor is a resident or non-resident.
Following the changes to the Finance Act, concerns have been raised about the methodology for calculating fair market value under two different laws.
IndusLaw partner Shruti KP said a tolerance limit of 10 percent of the valuation price is also allowed for both equity and CCPS issues.
“Clarity on the valuation norms for CCPS is long overdue and is indeed a welcome step, which can allay concerns over the tax implications of CCPS issuances, especially for foreign investors,” Shruti said.
(Except for the headline, this story has not been edited by DailyExpertNews staff and is published from a syndicated feed.)
