‘Angel Tax’ rules for valuing investments in start-ups notified
Government’s revised norms have widened to include foreign investments too
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NEW DELHI: The Income Tax Department has notified new angel tax rules that comprise a mechanism to evaluate the shares issued by unlisted start-ups to investors.
While previously the angel tax - a tax levied on capital received on the sale of shares of a start-up above the fair market value - applied only to local investors, the Budget for 2023-24 fiscal (April 2023 to March 2024) widened its ambit to include foreign investments.
As per the Budget, the excess premium will be considered as ‘income from sources’ and taxed at the rate of up to over 30 per cent. However, start-ups registered by the DPIIT are exempt from the new norms.
The Central Board of Direct Taxes (CBDT) in a September 25 notification spelled out the valuation methodology.
As per the changes in Rule 11UA of I-T rules, the CBDT provides that the valuation of compulsorily convertible preference shares (CCPS) and equity shares issued by unlisted startups can be based on the fair market value.
The amended rules also retain the five new valuation methods proposed in the draft rules for consideration received from the non-residents - (i) Comparable Company Multiple Method, (ii) Probability Weighted Expected Return Method, (iii) Option Pricing Method, (iv) Milestone Analysis Method, and (v) Replacement Cost Method.
Deloitte India Partner Sumit Singhania said from an investors’ standpoint, revised rules offer a wider range of valuation methodologies to work with, and that ought to make compliance less onerous henceforth.
“Also, safe harbour permitting 10 per cent deviation from fair value makes room for valuation adjustments when needed. Overall, the trajectory is to align tax valuation methodologies with permissible exchange control norms,” Singhania said.
Nangia & Co LLP Partner Amit Agarwal said the amendments to Rule 11UA of the Indian Income Tax Act bring positive changes by offering taxpayers flexibility through multiple valuation methods, simplifying the valuation date consideration, incentivising venture capital investments, facilitating investments from notified entities, providing clarity on CCPS and encouraging foreign investments.
“The inclusion of a tolerance threshold for minor valuation discrepancies further enhances efficiency and fairness in tax assessments, ultimately benefiting both taxpayers and the government.
The amended rules are aimed at bridging the gap between the rules outlined in FEMA and the income tax.
