Introduction: The Central Board of Direct Taxes (CBDT) has recently proposed significant changes to Rule 11UA of the Income-tax Act, 1961, regarding the valuation of shares and the applicability of section 56(2)(viib), commonly known as “Angel Tax.” These amendments aim to provide clarity and streamline the taxation process for consideration received from non-residents for the issue of shares.
Proposed Changes in Rule 11UA:
1. Expansion of Valuation Methods:
- The existing Rule 11UA prescribes two valuation methods, Discounted Cash Flow (DCF), and Net Asset Value (NAV) for resident investors.
- It is proposed to include five additional valuation methods for non-resident investors, in addition to DCF and NAV methods.
2. Consideration Received from Non-Resident Entities:
- If a company receives consideration for the issue of shares from a non-resident entity notified by the Central Government, the price of equity shares corresponding to such consideration may be taken as the Fair Market Value (FMV) for both resident and non-resident investors.
- Certain conditions apply, including that the consideration does not exceed the aggregate consideration received from the notified entity and the consideration is received within ninety days of the share issuance.
3. Price Matching for Resident and Non-Resident Investors:
- Similar price matching provisions would be applicable to investments by Venture Capital Funds or Specified Funds.
4. Acceptance of Valuation Report:
- A valuation report by a Merchant Banker will be acceptable if it is not more than ninety days old from the date of share issuance.
5. Safe Harbor Provision:
- To account for forex fluctuations, bidding processes, and other economic indicators affecting the valuation of unquoted equity shares, a safe harbor of a 10% variation in value is proposed.
Public Comments and Notification for Excluded Entities:
- The draft rules reflecting the proposed changes will be shared for public comments for a period of ten days before final notification.
- Certain classes of non-resident investors will be notified as excluded entities, to whom section 56(2)(viib) shall not be applicable. This includes: I. Government and government-related investors. II. Banks or entities involved in insurance business subject to applicable regulations. III. Specific entities registered with the Securities and Exchange Board of India, endowment funds, pension funds, and broad-based pooled investment vehicles or funds meeting specified criteria.
Exemption for Start-ups:
- The notification issued by the Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal Trade (DPIIT) will be modified to exempt consideration received by start-ups covered under specific categories from section 56(2)(viib) provisions.
Conclusion: The proposed changes to Rule 11UA and the notification of excluded entities by the CBDT aim to address the challenges faced by businesses, particularly start-ups and non-resident investors, in relation to Angel Tax provisions. These amendments reflect the government’s commitment to fostering a supportive ecosystem for MSMEs and promoting investment in the country’s entrepreneurial landscape. The period of public comments will provide an opportunity for stakeholders to provide their valuable feedback before the final rules are notified.
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