The finance ministry has brought out final valuation rules applicable to foreign investments into unlisted shares in India to determine whether it entails a premium that is liable to any levy under angel tax provisions.
The final rules notified by the ministry late on Monday seek to provide clarity to investors and give a set of valuation methods to chose from so that the worth of unlisted shares can be assessed accurately, and to help avoid getting caught in the angel tax net, an anti-avoidance measure that was extended to non-residents in Finance Act 2023.
As per the Income Tax Act, share premium received by entities without substantial public interest are taxable as 'income from other sources'. Start-ups have been claiming that this affects their ability to raise capital as most of these entities negotiate diluting their stake in the company based on future valuation of the company. By giving flexibility in the valuation methods, the government seeks to ensure that future prospects of the company are also taken into consideration in the valuation for tax purposes.
The Income-tax (Twenty first Amendment), Rules, 2023, which modifies rule 11UA are in force from Monday. The rules specify that the fair value of the shares will be as determined by the methods provided. Anything above, after accounting for a 10% safe harbour margin, will be deemed as taxable premium. The amended rules introduce a mechanism for arriving at the fair market value of Compulsorily Convertible Preference Shares (CCPS) for investment from residents as well as non-resident residents.
Experts welcomed the rules saying they offer ample flexibility to investors. The amendments to Rule 11UA of the Indian Income Tax Act bring positive changes by offering taxpayers flexibility through multiple valuation methods, simplifying the valuation date consideration, incentivizing venture capital investments, facilitating investments from notified entities, providing clarity on CCPS, and encouraging foreign investments, said Amit Agarwal, partner at Nangia & Co LLP.
The inclusion of a tolerance threshold for minor valuation discrepancies enhances efficiency and fairness in tax assessments, ultimately benefiting both taxpayers and the government, Agarwal said.
The new angel tax rules have very well taken care of an important aspect of CCPS valuation mechanism given that most of the investments in India by venture capital funds are through the CCPS route, said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.
Implementation of the rules would be interesting to watch since valuation is a subjective matter and a variety of valuation methods may be used with different approaches, which can potentially increase the litigation risks, said Maheshwari.
