The Center completes the valuation guidelines for the foreign angel tax

The “angel tax” imposed by the Indian government on foreign investments in unlisted Indian shares has officially been defined. These rules are intended to determine if the premium that these investments carry qualifies for angel tax advantages.

These final regulations, which the finance ministry announced late on Monday, are meant to provide investors the much-needed certainty. They provide a selection of valuation techniques, enabling an accurate assessment of the worth of unlisted shares. This action is being taken to protect investors from unintentionally falling into the angel tax trap; the Finance Act of 2023 enhanced this precaution to include non-resident investments.

Share premiums obtained by organizations without a major public interest are regarded as taxable as “income from other sources” under the Income Tax Act. As many of these entities negotiate the dilution of their holdings in the firm depending on the company’s future worth, startups have expressed concern that this taxing method hinders their attempts to obtain funding. The government wants to make sure that the company’s future prospects are taken into account when valuing it for tax reasons, hence it has introduced flexibility in valuation procedures.

Rule 11UA was modified on Monday by the Income-tax (Twenty-first Amendment) Rules of 2023, which entered into force. According to these regulations, the shares’ fair value shall be calculated in accordance with the established procedures. Anything beyond this amount, taking a 10% safe harbor buffer into account, will be regarded as a taxable premium. Additionally, a method for figuring out the fair market value of Compulsorily Convertible Preference Shares (CCPS) for investments from both residents and non-residents is introduced under these new laws.

These regulations have been praised by experts for their flexibility for investors. According to Amit Agarwal, a partner at Nangia & Co LLP, the amendments to Rule 11UA of the Indian Income Tax Act bring about a number of beneficial changes, including flexibility through the use of various valuation methods, simplification of valuation date considerations, incentives for venture capital investments, facilitation of investments from notified entities, clarification of CCPS, and encouragement of foreign investments.

According to Agarwal, the inclusion of a tolerance level for small value disparities improves the accuracy and fairness of tax assessments, which is advantageous to both taxpayers and the government.

The importance of these new regulations was recognised by Amit Maheshwari, Tax Partner at AKM Global, a tax and consulting business, especially in light of the Compulsorily Convertible Preference Shares (CCPS) valuation method. The CCPS method is how most venture capital funds invest in India. Maheshwari said that these regulations would be carefully watched since valuation is still a subjective affair that may be approached in numerous ways, thus raising the possibility of lawsuit.

What is angel tax? Angel tax, which the Indian government refers to as the “Income Tax on Share Premium,” is the name of a tax assessed on the extra funds that start-up businesses obtain when they sell shares to investors at a premium. If a start-up’s share price is higher than its fair market value, under Indian tax legislation, the excess is regarded as income and is subject to taxes, which may be as high as 30%. This tax has generated controversy since it was thought to deter startup investment and impede their expansion. The Indian government has frequently altered and clarified the laws governing angel tax to lessen its effect on early-stage businesses and investors in response to industry complaints.


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