CBDT’s New Angel Tax Rules: Valuation Methods & Safe Harbour

Central Board of Direct Taxes (CBDT) has issued a significant notification, Notification No. 81/2023 dated September 25, 2023, amending Rule 11UA of the Income Tax Rules. These amendments pertain to the valuation of unquoted equity shares for the purpose of Section 56(2)(viib) of the Income Tax Act, commonly known as the “Angel Tax.” The amendments introduce new methods for determining the fair market value (FMV) of such shares and also provide a safe harbor provision.

Rule 11UA(2)

Fair Market Value of Unquoted Equity Shares for the purpose of Section 56(2)(viib) [Rule 11UA(2)(A)]:

Valuation can be done by any of the above method at the option of Assessee.

Fair Market Value of Compulsorily Convertible Preference Shares (CCPS) for the purpose of Section 56(2)(viib) [Rule 11UA(2)(B)]:

• If consideration is received from Resident:
  • Methods prescribed above (for valuation of Unquoted Equity Shares) for Resident

Or

• • FMV of Unquoted Equity Shares

At the Option of Assessee

• If consideration is received from Non-Resident:
  • Methods prescribed above (for valuation of Unquoted Equity Shares) for Non-Resident

Or

• • FMV of Unquoted Equity Shares

At the Option of Assessee

Rule 11UA(3)

Where the date of valuation report by the merchant banker for the purposes of sub-rule (2) is not more than ninety days prior to the date of issue of shares which are the subject matter of valuation, such date may, at the option of the assessee, be deemed to be the valuation date **.

Provided that where such option is exercised under this sub-rule, the provisions of clause (j) of rule 11U shall not apply.

Rule 11UA(4)

Where issue price of the shares exceeds the value of shares determined under Sub-clause (a) and (b) by not more than 10% of valuation price, issue price shall be deemed to be the FMV of such shares. (Safe Harbour of 10% for Sub-clause (a) and (b))

* (A–L)× [PV/PE], where,

A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:—

• the paid-up capital in respect of equity shares;
• the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
• reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
• any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
• any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
• any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

PE = total amount of paid up equity share capital as shown in the balance-sheet;

PV = the paid up value of such equity shares; or

** “valuation date” means the date on which the property or consideration, as the case may be, is received by the assessee. [Rule 11U(j)]

Illustration for Sub-clause (c) given in Notification:

If a venture capital undertaking receives a consideration from a venture capital company as below

100 Shares * 500 Rupees = 50,000 Rupees.

Then such an undertaking can issue 100 shares at 500 Rupees per Share to any other investor within a period of 90 days before or after the receipt of consideration from venture capital company.

Conclusion

The CBDT’s amendments to Rule 11UA bring clarity and flexibility to the valuation of unquoted equity shares and CCPS for tax purposes. These changes are designed to streamline the valuation process, offer options for residents and non-residents, and provide a safe harbor for taxpayers. As businesses navigate these changes, it is crucial to assess their specific circumstances and choose the valuation method that best aligns with their needs while ensuring compliance with tax regulations.