New angel tax regulations have been announced by the Income Tax Department and include a system to assess the shares that unlisted firms offer to investors.
The CBDT has stipulated that the valuation of CCPS may also be based on the fair market value of unquoted equity shares in accordance with the amendments to Rule 11UA of the Income Tax Rules, which take effect on September 25.
In accordance with section 56(2)(viib) of the Income-tax Act, 1961 (the Act), In order to bring the consideration received from non-residents for the issuance of shares by an unlisted company within its ambit, the Finance Act, 2023 introduced an amendment to the Income Tax Act, which states that if the consideration for the issuance of shares exceeds the Fair Market Value (FMV) of the shares, it shall be chargeable to income-tax under the head “Income from other sources.”
In accordance with the new angel tax system envisaged in the Finance Act 2023, the Finance Ministry on Tuesday issued final valuation guidelines for domestic and international investors into shares of unlisted firms, such as start-ups.
The extra sub-clause of compulsorily convertible preference shares (CCPS) in the regulations has been addressed in order to answer the concerns from the industry. The ministry had omitted CCPS, which are widely utilized to provide fledgling companies with funding, from a draft of the regulations that was published in May.
The Central Board of Direct Taxes (CBDT) has specified that the valuation of CCPS may also be based on the fair market value of unquoted equity shares in accordance with modifications to Rule 11UA of the Income Tax Rules, which take effect on September 25.
As part of the government’s commitment to including stakeholders in the preparation of the legislation, stakeholders and the general public were encouraged to provide comments and input on the Draft Rule 11UA for valuation of techniques for determining the Fair Market price. Press release from May 19, 2023.
Rule 11UA for the valuation of shares for the purposes of section 56(2)(viib) of the Act has been updated according to notice no. 81/2023 dated September 25, 2023, taking into account the proposals submitted in this respect and in-depth discussions undertaken with stakeholders.
The following are the main points of the modifications to Rule 11 UA:
a) Five additional share valuation methods, including the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method, have been made available to non-resident investors in addition to the two methods for valuing shares, namely the Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods, available to residents under Rule 11UA.
b) In the event that any payment is received for the issuance of shares from a non-resident company that has been notified by the Central Government, the price of the equity shares that correspond to such consideration may be considered the FMV of the equity shares for resident and non-resident investors, subject to the following:
(i) Insofar as the consideration from such FMV is not greater than the total consideration that is received from the notified entity; and (ii) Insofar as the company received the consideration from the notified entity within a period of ninety days prior to or following the date of issue of the shares that are the subject of the valuation.
c) Along the same lines, price matching for resident and non-resident investors in relation to investments made by venture capital funds or specified funds would be accessible.
d) There are also presented valuation techniques for determining the FMV of Compulsorily Convertible Preference Shares (CCPS).
g) A 10% safe harbor for value variance has been offered.
In order to provide resident and non-resident investors a level playing field, the announced Rule calls for the broadening of the valuation procedures to include those that are widely acknowledged across the world.