Explore the proposed changes to Rule 11UA for Angel Taxation introduced by the Finance Act, 2023, focusing on valuation methods for non-resident investors and entities exempted from Angel Taxation.
The Finance Act, 2023 introduced an amendment to bring consideration received from non-residents (NR) for the issuance of shares within the scope of section 56(2)(viib), commonly known as ‘Angel Taxation,’ of the Income-tax Act, 1961. This amendment states that if the consideration for the issuance of shares exceeds the Fair Market Value (FMV) of the shares, it will be subject to income tax under the head ‘Income from other sources.’
In response to this amendment, the Central Board of Direct Taxes (CBDT) has proposed changes to Rule 11UA for the valuation of shares under section 56(2)(viib) of the Act. These proposed changes aim to include additional valuation methods, specifically for non-resident investors, in addition to the Discounted Cash Flow (DCF) and Net Assets Value (NAV) methods used for resident investors.
The proposed changes to Rule 11UA can be summarized as follows:
1. Valuation Methods: In addition to the DCF and NAV methods, five more valuation methods will be available for non-resident investors.
2. Consideration from Notified NR Entities: If a company receives consideration for the issuance of shares from a notified NR entity by the Central Government, the price will be considered as the FMV of the equity shares for both resident and NR investors, provided that:
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- The consideration does not exceed the aggregate consideration received from the notified entity.
- The consideration is received by the company from the notified entity within ninety days of the date of issue of the shares being valued.
3. Matching Concept: Similar matching concepts will apply to resident and non-resident investors in reference to investment by Venture Capital Funds or Specified Funds.
4. Valuation Report: The valuation report by the Merchant Banker for the purposes of this rule should not be more than 90 days prior to the date of issue of the shares being valued.
5. Safe Harbor Variation: A safe harbor variation of 10% in value is allowed to account for forex fluctuations, bidding processes, and variations in other economic indicators that may affect the valuation of unquoted equity shares during multiple rounds of investment.
Entities proposed to be exempted from Angel Taxation include:
- Government and government-related investors with 75% or more direct or indirect ownership by the government.
- Foreign banks or entities involved in insurance business subject to applicable regulations.
- Eligible start-ups as covered in the Press Release dated 19.2.2019 issued by the Ministry of Commerce and Industry.
- Resident entities of certain countries or specified territories with a robust regulatory framework, including SEBI registered Category-I Foreign Portfolio Investors, endowment funds associated with universities, hospitals, or charities, foreign pension funds, and broad-based pooled investment vehicles or funds with more than 50 investors that are not hedge funds or funds employing diverse or complex trading strategies.
Conclusion:
Proposed changes to the Angel Taxation rules provide more relaxation in terms of valuation and other aspects for non-resident investors. These changes aim to address illegitimate or non-genuine transactions while promoting investment in eligible start-ups.
Source: CBDT proposes changes to Rule 11UA ANGEL TAX & to notify Excluded Entities
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