New angel tax regulations, which include a system to evaluate the shares issued by unlisted firms to investors, have been made known by the Income Tax Department.
The Income-tax Act of 1961 (the Act) was amended by the Finance Act of 2023 to include the consideration received from non-residents for the issuance of shares by an unlisted company within its purview. The Act’s section 56(2)(viib) states that if the consideration for the issuance of shares exceeds the Fair Market Value (FMV) of the shares, it shall be subject to income tax under the heading “Income from other sources.”
As part of the government’s commitment to include stakeholders in the preparation of the law, comments and recommendations on the Draft Rule 11UA for valuing the approaches to determining the Fair Market Price were solicited from stakeholders and the general public. Press announcement from May 19, 2023.
In accordance with the notification number. 81/2023 dated September 25, 2023, Rule 11UA for the valuation of shares for the purposes of section 56(2)(viib) of the Act has been changed in light of the proposals submitted in this regard and the extensive discussions held with stakeholders.
a) In addition to the two share valuation techniques, Discounted Cash Flow (DCF) and Net Asset Value (NAV), made available to residents under Rule 11UA, five additional share valuation techniques, 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.
b) The price of the equity shares equivalent to the consideration received for the issuance of shares from any non-resident entity that has been notified by the Central Government 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 above the total consideration received from the notified entity.
(ii) Within ninety days before or after the date the shares that are the subject of the valuation were issued, the company received the payment from the notified entity.
c) Along the same lines, price matching with regard to investments made by venture capital funds or specified funds would be available to resident and non-resident investors.
d) Valuation techniques have also been offered in order to determine the FMV of Compulsorily Convertible Preference Shares (CCPS).
g) A 10% value fluctuation safe harbor has been offered.
The announced Rule calls for a broad parity between resident and non-resident investors and a broadening of the valuation procedures to incorporate internationally recognized methodologies.
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