Centre issues final regulation of new angel tax rules

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Centre issues final regulation of new angel tax rules

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

An unlisted company that issue shares to an investor at a price higher than its fair market value will be subject to Angel tax. All five valuation methods from the draft rules have been retained in the final regulation, according to the notification. A mechanism has also been adopted to arrive at the fair market value of Compulsorily Convertible Preference Shares for investment from residents as well as non-resident residents.

But Earlier this year, only investments made by a resident investor were used to attract angel tax, however, it was extended to non-resident investors in the current budget. However, budget 2023-24 introduced provisions to extend the angel tax for non-resident investors as of April 1, 2024.

The Finance Act, 2023, has enacted amendments to section 56 of the I-T Act, bringing overseas investment in unlisted companies under the tax net.

Angel tax is the tax levied on capital raised by unlisted companies if the share price of issued shares is greater than the company's fair market value.

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

The amendments were aimed at bridging the gap between the rules outlined in the FEMA and the Income Tax.

The income tax Act states that share premiums received by individuals without significant public interest are taxable as 'income from other sources'.

As most start-ups negotiate diluting their holding in the company based on the future valuation of the company, it has been argued that this rule affects their ability to raise capital.

The Centre provides flexibility in the valuation methods to ensure that future prospects of the company are also taken into account for tax purposes.

In addition to the latest amendments to the I-T regulations, the Central Board of Direct Taxes provides that the valuation of compulsorily convertible preference shares can also be based on the fair market value of unquoted equity shares.

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

Any above, after accounting for a 10 per cent margin, will be deemed taxable premium.

The amendments also retain the five new valuation methods proposed in the draft rules for consideration from the non-residents viz., the comparativable company multiple method, probability weighted anticipated return method, option pricing method, milestone analysis method, and replacement cost method.

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

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 the decision to declare a state of emergency was a decision taken by the government of India.

Experts said 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.

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

The CBDT also informed 21 countries where investment in start-ups will be exempted from angel tax.