The Income Tax Office has issued new angel tax rules that encompass a mechanism to evaluate shares issued by unlisted startups to investors.
While the angel tax - a tax levied on capital received on the sale of shares of a startup above the fair market value - was only applied to local investors, the budget for the 2023-24 fiscal expanded its ambit to include foreign investments.
As a tax, the excess premium will be considered as income from sources and taxed at the rate of up to 30 percent.
The new norms are exempted from the DPIIT's register of startups.
The valuation methodology was instituted in a notification on September 25 by the Central Board of Direct Taxes.
The Central Board of Direct Taxes provides that the valuation of convertible preference shares and equity shares issued by unlisted startups can be based on fair market value, as per the amendments to Rule 11UA of the I-T rules.
The amendments also include the five new valuation methods proposed by the non-residents--Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method.
Deleitte India partner Sumit Singhania said: revised rules offer a wider range of valuation methodologies to work with, and that ought to make compliance less onerous henceforth.
Singhania, 73, said the president's decision was a step in the direction of boosting India's economy.
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 valuation date consideration, incentivising venture capital investments, facilitating investments from notified entities, providing clarity on CCPS and encouraging foreign investments.
The introduction of a tolerance threshold for minor valuation discrepancies further enhances efficiency and fairness in tax assessments, ultimately benefiting both taxpayers and the government.
Agarwal said the government is doing everything possible to ensure that the projects are implemented in a fair and transparent way.
SW India's managing partner and co-founder, Atul Puri, said the CBDT has amendments to rule 11UA to arrive at the fair market value of unquoted shares issued to residents and non-resident investors.
At this point, rule 11UA provides two methods for the valuation of unquoted shares--the DCF method and NAV 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 officers and non-resident investors.
Amended rule 11UA has five additional valuation methods available as an option to non-resident investors, including DCF and NAV methods. However, residents cannot value equity shares as per any of these five methods.
Puri said the situation in India is worsening, not better than in the past, which has resulted in a decline in incomes.
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.
Mahashwari added: He added that the Indian government had not made any strides in terms of safeguarding terrorism.
In May the CBDT had proposed draft rules on the valuation of funding in unrecognised and unrecognized startups for levying income tax, commonly known as levying income tax, and had invited public comments on it.
The amendments are designed to bridge the gap between the rules outlined in FEMA and the income tax.
In the past, only investments by local investors or residents in closely held companies or unlisted firms were taxed over and above the fair market value. This was commonly known as an angel tax.
If the investor is a resident or non-resident, he or she will be taxed for such investments over and beyond the FMV.
The proposed amendments to the Finance Act have raised concerns about the methodology of calculating fair market value under two different laws.
IndusLaw partner Shruti K P said that a tolerance limit of 10 percent of the valuation price has also been allowed for both equity and CCPS issuances.
Shruti said he was happy that he had a chance to win the election, adding: ''It's a big honour to be here,'' he said.