Centre releases final rules for angel tax valuation

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Centre releases final rules for angel tax valuation

The Centre has notified the final rules outlining valuation methods for non-resident and local investors under the new angel tax mechanism, based on changes made in the Finance Act 2023.

An unlisted company offers shares to investors at a higher price than its fair market value, which will be a tax on angel tax. All five valuation methods from the draft rules have been retained in the final regulation, according to the notification. A mechanism for arriving at the fair market value of Compulsorily Convertible Preference Shares has been adopted for investment from residents as well as non-resident residents.

Previously, only investments made by a resident investor could attract angel tax, but it was extended to non-resident investors in the current budget. However, budget 2023-24 introduced provisions to extend the angel tax to non-resident investors as of April 1, 2024.

The Finance Act, 2023, has changed section 56 of the I-T Act, thereby bringing overseas investment in unlisted companies into the tax net.

In layman's terms, angel tax is the tax levied on the capital raised through theissuance of shares by unlisted companies if the share price of the company's shares falls in excess of the fair market value.

The CBDT had proposed draft rules for valuation of funding in unlisted and unidentified startups for levying income tax, commonly known as levying income tax, in May, and had invited public comments on it.

The amendments are aimed at bridging the gap between the Income Tax and FEMA regulations.

The income tax act states that share premium received by companies without substantial public interest are taxable as 'income from other sources'.

The fact that start-ups are obligated to diluting their stake in the company based on future valuation of the company is a reason that they claim that this rule affects their ability to raise capital.

The Centre gives flexibility in valuation methods, aiming to ensure that future prospects of the company are also considered in the valuation for tax purposes.

The value of convertible preference shares can be calculated based on fair market value of unquoted equity shares, according to the new rules of the Central Board of Direct Taxes.

The rules state that the fair value of the shares will be determined by the methods provided.

All above 'taxable premium' will be regarded as taxable premium after accounting for a 10 percent margin.

The amendments also retain the five new valuation methods proposed by the non-residents viz., the Comparable Company Multiple method, Probability Weighted Expected return method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method.

Nangia & Co partner Amit Agarwal, the partner of Nangia & Co, said the amendments to Rule 11UA of the Indian Income Tax Act bring positive changes by offering taxpayers flexibility through multiple valuation methods, simplifying valuation date consideration, incentivising venture capital investments, facilitating investments from notified entities, providing clarification on CCPS and encouraging foreign investments.

AKM Global Tax partner Amit Maheshwari said that 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 is through the CCPS route only.

Maheshwari added that India has been working hard to make it a reality.

Experts told Business Today that the angel tax changes were much-needed, considering the somber mood within the ecosystem owing to the funding winter. The stakeholders believe that inflow of foreign capital, especially in the current times, is of vital importance to the ecosystem.

sudhanva Sundararaman, senior director of Deshpande Startups, says start-ups need 'additional capital options beyond domestic-based funds' to survive the cash crunch.

CBDT notifies 21 nations where investment in start-ups will be exempted from angel tax.