The Income Tax Department has instituted new angel tax rules 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 over the fair market value - was applied only to local investors, the budget for the 2023-24 fiscal 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 exempt from the new norms.
In a notification on September 25th, the Central Board of Direct Taxes outlined the valuation methodology.
The value of convertible preference shares and equity shares issued by unlisted startups can be based on the fair market value, according to the changes in Rule 11UA of the I-T regulations.
The amendments also retain the five new valuation methods proposed in the draft rules for consideration by the non-residents--the comparable company multiple method, probability weighted anticipated 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 said it was important for India to maintain its balance of power, based on the values of India's economy.
The amendments to Rule 11UA of the Indian Income Tax Act bring positive changes by providing taxpayers flexibility by offering multiple valuation methods, simplifying the valuation date consideration, incentivising venture capital investments, providing clarification on CCPS and encouraging foreign investments by Nangia & Co LLP partner Amit Agarwal said.
The inclusion of a tolerance limit for minor valuation discrepancies further enhances efficiency and fairness in tax assessments, ultimately benefiting both taxpayers and the government.
Agarwal, speaking on condition of anonymity, said: ''It is important for India to know that Mr. Agarwal is a member of the cabinet,'' he said.
Atul Puri, South India's managing partner and co-founder, said the CBDT has modified Rule 11UA to arrive at the fair market value of unquoted shares issued to residents and non-resident investors.
At present, rule 11UA has two methods for the valuation of unquoted shares, the DCF method and the NAV method for resident investors.
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 provides five more valuation methods available to non-resident investors, in addition to DCF and NAV methods. However, the option to value equity shares as per any of these five methods is not available to resident investors.
Puri said: ''I know some people who say this is good, but a lot of people say that's bad,'' he said.
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 that Kashmir's parliament has decided to approve a resolution for Kashmir's supreme court.
In May, the CBDT published 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 new rules are designed to bridge the gap between FEMA and the income tax.
To date, only investments by local investors or residents in closely held firms or unlisted firms were taxed over and above the fair market value. An angel tax is often referred to as an angel tax.
The Finance Act, 2023, has made it clear that 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, concern has been raised about the methodology used to calculate fair market value under the amendments introduced in 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, 61, said that the government was working hard to make India a better country.