Angel Tax: The tax department notifies of ‘angel tax’ rules for the valuation of investments in Startups.
New Delhi, Sep 26 (Trending News Fox) The Income Tax Department has notified new angel tax rules, including a mechanism for valuing shares issued by unlisted startups to investors.
While earlier angel tax – a tax levied on the capital received on the sale of shares of a startup above the fair market value – was applicable only to local investors, the Budget for the 2023-24 financial year (April 2023 to March 2024) has expanded its scope. Increased. Includes foreign investment.
According to the Budget, the additional premium will be treated as ‘income from sources’ and will be taxed at a higher rate of 30 per cent. However, startups registered with DPIIT are exempted from the new norms.
Final valuation rules on angel tax provide clarity to start-ups: Experts
The final valuation rules for angel tax broadly mirror the draft rules unveiled by the Finance Ministry in May, but provide significant relief by including provisions related to compulsorily convertible preference shares (CCPS) that provide venture capital. Fund and foreign investors will help in financing.
Experts have welcomed the final rules that provide clarity and flexibility for valuing foreign investments in unlisted companies at a premium but some concerns remain about how it will be implemented.
The final rules, which were notified by the Central Board of Direct Taxes and came into effect on September 25, have retained the five valuation criteria provided in the draft rules, including comparable company multiple method, probability-weighted expected returns method, and option pricing. Method, milestone included. Analysis Method, and Replacement Cost Method.
However, the final rules have introduced a mechanism to arrive at the fair market value of compulsorily convertible preference shares (CCPS) for investments by residents as well as non-resident residents. These tools are seen as a key element in raising funds by start-ups.
The regulations provide that the valuation of CCPS may also be based on the fair market value of unquoted equity shares. The draft rules also provided that where the date of the merchant banker’s valuation report is more than 90 years before the date of issue of shares, that date may be treated as the valuation date if the assessee so desires.
The final rule states that if such an option is exercised, the provisions of Rule 11U(j) will not apply. It also provides for a 10 per cent safe harbour which applies to the valuation of both unquoted equity shares and CCPS where the issue price of shares is higher than the value of the shares.