The Central Board of Direct Taxes (CBDT) has proposed changes to the Rule 11UA on the Angel tax and also proposed to notify the excluded entities.
The government has suggested extending the ‘angel tax’ restrictions to deals involving overseas investors in the Union Budget 2023–24. Angel taxes are levied on startup capital if it exceeds the company’s fair market value.
According to Section 56(2)(viib) of the Income Tax Act, the excess of the issue price over the fair market value of the shares will be taxed as the issuing company’s income if a closely-held company offers shares to a resident investor at a value greater than the “fair market value” of such shares.
Also, when the investors are investing in an Indian company that has received government recognition and is registered with the Department for Promotion of Industry and Internal Trade (DPIIT), overseas investors won’t be subject to any angel taxes. Thus these proposals won’t apply to any of the investments in the Startups in India.
It was already stated that the formula for calculating the fair market value of unquoted equity shares for purposes of section 56(2)(viib) of the Act is provided in Rule 11UA or of the Income-tax Rules.
The proposed changes in Rule 11UA are:
- Rule 11UA of Income Tax Rules currently has two valuation methods with respect to valuation of shares namely, Discounted Cash Flow (DCF) and Net Asset Value (NAV) method for resident investors. It is now proposed to include 5 more valuation methods, available for non-resident investors, in addition to the DCF and NAV methods of valuation.
- Further, where any consideration is received by a company for issue of shares , from any non-resident entity notified by the Central Govt, the price of the equity shares corresponding to such consideration may be taken as the FMV of the equity shares for resident and non-resident investors subject to the following: To the extent the consideration from such FMV does not exceed the aggregate consideration that is received from the notified entity and The consideration has been received by the company from the notified entity within a period of ninety days of the date of issue of shares which are the subject matter of valuation.
On similar lines, price matching for resident and non-resident investors would be available with reference to investment by Venture Capital Funds or Specified Funds.
- It is proposed that the valuation report by the Merchant Banker for the purposes of this rule would be acceptable, if it is of a date not more than ninety days prior to the date of issue of shares which are subject matter of valuation.
- Further, to account for forex fluctuations, bidding processes and variations in other economic indicators, etc. which may affect the valuation of the unquoted equity shares during multiple rounds of investment, it is proposed to provide a safe harbor of 10 % variation in value.
- The draft Rules on the above lines will be shared for public comments for 10 days, after which these will be notified.
Excluded entities are:
Additionally, it is suggested that non-resident investors belonging to specific categories of people be informed that clause (viib) of subsection (2) of section 56 of the Act does not apply to them. This comprises:
- Government and government-related investors, such as central banks, sovereign wealth funds, international or multilateral organisations or agencies, including enterprises under government control or when the government owns at least 75% of the company directly or indirectly.
- Banks or entities engaged in the insurance business that are subject to the laws of the nation in which they were founded, incorporated, or have their primary residence.
- Any of the following entities, which is a resident of a certain countries or specified territories having robust regulatory framework:-
- Entities registered with Securities and Exchange Board of India as Category-I Foreign Portfolio Investors.
- Endowment Funds associated with a university, hospitals or charities,
- Pension Funds created or established under the law of the foreign country or specified territory,
- Broad Based Pooled Investment Vehicle or Fund where the number of investors in such a vehicle or fund is more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.
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