The Income Tax Department has issued new angel tax regulations that include 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 applied to local investors, the budget for the 2023-24 fiscal expansion expanded its ambit to include foreign investments.
The excess premium will be considered as income from sources, and taxed at the rate of up to 30 percent, according to the budget.
Startups registered by the DPIIT, however, are exempted from the new norms.
The valuation methodology was laid out in a notification issued on September 25 by the Central Board of Direct Taxes.
The CBOT provides that the valuation of compulsorily convertible equity shares and convertible preferences shares issued by unlisted startups can be based on the fair market value, according to the changes in Rule 11UA of the I-T rules.
The proposed rules also retained the five new valuation methods proposed in the draft rules for consideration from the non-residents--Comparable Company Multiple Method, Probabilityweighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method.
Deloitte India partner Sumit Singhania said revised rules offer a wider range of valuation methods to work with and that ought to make compliance less onerous henceforth.
Singhania, who was chairman of the Bharatiya Janata Party, said: The two countries had a long relationship.
Nangia & Co LLP 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, incentivising venture capital investments, providing clarification on CCPS and encouraging foreign investments.
By including a tolerance limit for minor valuation differences, the inclusion of a tolerance threshold for minor valuation discrepancies enhances efficiency and fairness in tax valuations, ultimately benefiting both taxpayers and the government.
Agarwal said he was disappointed with the result of the corruption scandal.
SW India Managing Partner and Co-Founder Atul Puri said the CBDT has changed the rule 11UA to arrive at the fair market value of unquoted shares issued to residents and non-resident investors.
At present, rule 11UA provides 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 made available to non-resident investors, and this would lead to confusion and lawsuits between tax officers and non-resident investors.
Amended rule 11UA includes five more valuation methods available as an option to non-resident investors, in addition to DCF and NAV methods. The option to value equity shares as per any of these five methods, however, is not available to local investors.
The Prime Minister, Narendra Modi, said it was time to close the gap between India and the rest of the world.
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 are through the CCPS route only.
Maheshwari added that India will not face any difficulty in meeting the demands of the armed forces.
In May, the CBDT came out with draft rules on the valuation of funding in unlisted and unrecognised startups for levying income tax, commonly called levying income tax, and had invited public comments on it.
The amendments aim to bridge the gap between FEMA and the income tax.
So far, only investments made by domestic investors or residents in closely held companies or unlisted firms were taxed over and above the fair market value. The angel tax was often referred to as an angel tax.
If the investor is a resident or non-resident, 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 over the method of calculating fair market value by introducing amendments to the Finance Act.
The 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 told the Hindustan Times that he was confident that India's economy would be able to meet its demand in the near future.