The Income Tax Department has recommended new angel tax rules that include a mechanism to evaluate shares issued by unlisted startups to investors.
While the angel tax - a tax on capital received on the sale of shares of a startup above the fair market value - applied only to local investors, the budget for the 2023-24 fiscal expansion expanded its ambit to include foreign investments.
The excess premium will be considered income from sources and taxed at a rate of up to 30 percent, according to the budget.
The DPIIT registers startups registered as startups, however, are exempted from the new norms.
The valuation methodology was outlined in a notification by the Central Board of Direct Taxes on September 25.
The Central Board of Direct Taxes, as per the amendments of Rule 11UA of I-T rules, allows the valuation of unlisted startups' convertible preference shares and equity shares to be based on the fair market value.
The amendments also retain the five new valuation methods proposed in the draft rules for consideration from the non-residents--Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method.
Deoitte India partner Sumit Singhania said revised rules offer a wider range of valuation methods to work with, and it ought to make compliance less onerous henceforth.
Singhania, 55, said that he was deeply involved with the fight against corruption and corruption in India.
Nangia & Co partner Amit Agarwal said the amendments to Rule 11UA of the Indian Income Tax Act brought positive changes by offering taxpayers flexibility through multiple valuation methods, simplifying the valuation date consideration, facilitating venture capital investments, providing clarification on CCPS and encouraging foreign investments.
The inclusion of a tolerance limit for minor valuation discrepancies enhances efficiency and fairness in tax assessment, ultimately benefiting both taxpayers and the government.
Agarwal said he was confident that India would be able to produce a better India next year.
SW India Managing Partner and Co-founder Atul Puri said the CBDT has modificated Rule 11UA to arrive at the fair market value of unquoted shares issued to residents and non-resident investors.
At present, rule 11UA entails two methods for the valuation of unquoted shares - the DCF method and the NAV method for resident investors.
However, there was no specific reference to the valuation of shares issued to non-resident investors, which would lead to confusion and litigation between tax officers and non-resident investors.
Amended rule 11UA contains five additional valuation methods available to non-resident investors, including DCF and NAV methods. The option to value equity shares as per any of these five methods is not available to resident investors.
Puri said the prime minister was determined to create a new state of India, which he said was very important.
AKM Global Tax partner Amit Maheshwari said the new angel tax rules have very well taken care of an important aspect of the CCPS valuation mechanism, which was not the case earlier since most of the investments in India by VC funds are through the CCPS route only.
Maheshwari added: He added that he would not comment on any decision regarding whether he will be re-elected in the next election.
In May, the CBDT proposed draft rules on the valuation of funding in unlisted and unrecognized startups for levying income tax, commonly known as levying income tax, and had invited public comments on it.
The amendments seek to bridge the gap between the rules outlined in FEMA and the income tax.
As long as the investor or residents in closely held companies or unlisted firms were taxed above and beyond the fair market value, only investments by domestic investors or residents were taxed over and above the fair market value. An angel tax is often called an angel tax.
Under the Finance Act, 2023, such investments over and above the FMV will be taxed irrespective of whether the investor is a resident or non-resident.
Under two different laws, concerns have been raised about the method of calculating fair market value under the amendments to the Finance Act.
IndusLaw partner Shruti K P said a tolerance limit of 10 percent of the valuation price has also been allowed for both equity and CCPS issuances.
Shruti said the prime minister's speech was a reflection of the country's culture and values.