CBDT notifies angel tax provisions
Angel tax provisions i.e., Rule 11UA of Income tax rules notified by the Central Board of Direct Taxes (CBDT)
Background
Section 56(2)(vii)(b) imposes a restriction on issuance of shares by an Indian company to residents for a consideration above fair value. Such excess above fair value would be subject to tax in the investee company hands. Certain exemptions were provided for issue of shares to Venture Capital Funds (‘VCF’), Venture Capital Company (‘VCC’) or Alternative Investment Funds (Category I & II) registered with Securities Exchange Board of India (‘SEBI’).
The Indian Government in the Finance Act, 2023 (Budget 2023) proposed to expand the scope of section 56(2)(vii)(b) to include issue of shares to non-residents as well. This amendment triggered a lot of concerns from overseas investors’ perspective specifically in the startups space. In this regard, the tax authorities issued draft rules on May 26, 2023 proposing certain changes to provisions and rules. Now, the amendment has been officially notified by CBDT, vide Notification No. 81/2023 dated September 25, 2023.
Key takeaways from the notification
The notification provides the methods of calculation of FMV as captured below:
In relation to computation of Fair Market Value of issue of equity shares:
| S.No | Equity shares | |
| Issue to non-residents | Issue to residents | |
| a | NAV Method as per Rule 11UA or DCF method determined by Merchant banker | NAV Method as per Rule 11UA or DCF method determined by Merchant banker |
| b* | Consideration received by a venture capital undertaking for issue of shares from a venture capital fund (‘VCF’) or a venture capital company (‘VCC’) or a specified fund (‘SF’) – This issue price can be used as a reference point for determining FMV | |
| c | Five additional methods: Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method | Not applicable |
| d* | Consideration received by a company for issue of shares from the entities notified under clause (ii) of the first proviso to clause (viib) of sub-section (2) of section 56 within a period of 90 days from date of issue – This issue price can be used as a reference point for determining FMV | |
CBDT notifies similar mechanism for determining the fair market value of Compulsorily Convertible Preference Shares (CCPS) for investment from residents & non-residents. It also provides an option to adopt fair market value (FMV) of unquoted equity shares for determining FMV of CCPS.
In relation to point (b) and (d) captured above, please note the below points:
- Consideration received should not exceed the aggregate consideration (shares issued) that is received from a venture capital fund or a venture capital company or a specified fund or entity notified under clause (ii) of the first proviso to clause (vii)(b) of sub-section (2) of section 56;
- Such an issue must be carried out within a period of 90 days from date of issue to such VCF, VCC or SF or such notified entities;
- The entities notified under clause (ii) of the first proviso to clause (vii)(b) of sub-section (2) of section 56 includes Government and Government related investors, Banks or entities in Insurance business. It also includes residents of certain countries (as captured in the Notification No. 29/2023) where they are Category-I Foreign Portfolio Investors, endowment funds, pension funds and Broad-Based Pooled Investment Vehicle or fund where the number of investors in such vehicle or fund is more than fifty and such fund is not a hedge fund. Attached the captioned notification for your reference.
Other notable points
- Where the date of merchant banker’s valuation report is not more than 90 days prior to the date of issue of shares under valuation, then such date can be deemed to be the valuation date if the assessee so chooses;
- A 10% safe harbour is applicable on valuation of both unquoted equity shares and CCPS arrived.
