New Angel Tax Rules For Valuing Investments In Unlisted Start-Ups

New Delhi:

The Revenue Tax Division has notified new angel tax guidelines that comprise a mechanism to judge the shares issued by unlisted startups to traders.

Whereas beforehand the angel tax – a tax levied on capital acquired on the sale of shares of a startup above the truthful market worth – utilized solely to native traders, the Finances for the 2023-24 fiscal (April 2023 to March 2024) widened its ambit to incorporate international investments.

As per the Finances, the surplus premium shall be thought-about as ‘earnings from sources’ and taxed on the price of as much as over 30 p.c. 

Nevertheless, startups registered by the DPIIT are exempt from the brand new norms.

The Central Board of Direct Taxes (CBDT) in a September 25 notification spelled out the valuation methodology.

As per the adjustments in Rule 11UA of I-T guidelines, the Central Board of Direct Taxes (CBDT) offers that the valuation of compulsorily convertible choice shares (CCPS) and fairness shares issued by unlisted startups will be based mostly on the truthful market worth.

The amended guidelines additionally retain the 5 new valuation strategies proposed within the draft guidelines for consideration acquired from the non-residents — (i) Comparable Firm A number of Technique, (ii) Likelihood Weighted Anticipated Return Technique, (iii) Choice Pricing Technique, (iv) Milestone Evaluation Technique, and (v) Alternative Price Technique.

Deloitte India Companion Sumit Singhania mentioned from an traders’ standpoint, revised guidelines provide a wider vary of valuation methodologies to work with, and that should make compliance much less onerous henceforth.

“Additionally, protected harbour allowing 10 p.c deviation from truthful worth makes room for valuation changes when wanted. Total, the trajectory is to align tax valuation methodologies with permissible change management norms,” Singhania mentioned.

Nangia & Co LLP Companion Amit Agarwal mentioned the amendments to Rule 11UA of the Indian Revenue Tax Act convey constructive adjustments by providing taxpayers flexibility by a number of valuation strategies, simplifying the valuation date consideration, incentivising enterprise capital investments, facilitating investments from notified entities, offering readability on CCPS and inspiring international investments.

“The inclusion of a tolerance threshold for minor valuation discrepancies additional enhances effectivity and equity in tax assessments, finally benefiting each taxpayers and the federal government.

“These adjustments provide taxpayers a broader vary of valuation strategies to select from, together with internationally recognised approaches, thereby attracting international investments and fostering readability. Furthermore, the notified last rule introduces a further sub-clause particularly addressing CCPS,” Agarwal mentioned.

SW India Managing Companion and Co-founder Atul Puri mentioned the CBDT has amended Rule 11UA to reach on the truthful market worth of unquoted shares issued to resident and non-resident traders.

Rule 11UA at current prescribes two strategies for the valuation of unquoted shares — DCF (Discounted Money Stream) methodology and NAV (Internet Asset Worth) methodology for resident traders.

Nevertheless, there was no particular reference to the valuation of shares issued to non-resident traders, and this is able to result in confusion and litigation between tax officers and non-resident traders.

Amended Rule 11UA consists of 5 extra valuation strategies obtainable as an choice to non-resident traders, along with DCF and NAV strategies. Nevertheless, the choice to worth fairness shares as per any of those 5 strategies isn’t obtainable to resident traders.

“The amended Rule 11UA is a welcome transfer, which brings in additional readability for each investor and investee, foundation which an acceptable valuation methodology will be adopted, thereby decreasing the possibilities of any future litigation and addressing illegitimate or non-genuine transactions whereas selling investments in eligible startups,” Puri mentioned.

AKM International Tax Companion Amit Maheshwari mentioned the brand new angel tax guidelines have very properly taken care of an essential facet of the CCPS valuation mechanism, which was not the case earlier since many of the investments in India by VC funds are by the CCPS route solely.

“The extension of 10 p.c protected harbour to CCPS investments because it was earlier meant for fairness shares will give a mandatory margin of security for caring for international change fluctuations and is a welcome transfer,” Maheshwari added.

The CBDT had in Might come out with draft guidelines on the valuation of funding in unlisted and unrecognised startups for levying earnings tax, generally termed as ‘Angel Tax’, and had invited public feedback on it.

The amended guidelines are aimed toward bridging the hole between the foundations outlined in FEMA and the earnings tax.

To date, solely investments by home traders or residents in carefully held firms or unlisted companies have been taxed over and above the truthful market worth. This was generally known as an angel tax.

The Finance Act, 2023, has mentioned that such investments over and above the FMV shall be taxed no matter whether or not the investor is a resident or non-resident.

Put up the amendments within the Finance Act, considerations have been raised over the methodology of calculation of truthful market worth beneath two totally different legal guidelines.

IndusLaw Companion Shruti Ok P mentioned a tolerance restrict of 10 p.c of the valuation value has additionally been allowed for each fairness and CCPS issuances.

“Readability on valuation norms for CCPS was lengthy overdue and is certainly a welcome transfer, which can alleviate considerations on tax implications of CCPS issuances, particularly to international traders,” Shruti mentioned. 

(Apart from the headline, this story has not been edited by NDTV employees and is revealed from a syndicated feed.)