The government has notified the final rules on valuations applicable to foreign investments under the new angel tax mechanism proposed in the Finance Act 2023.
According to the announcement, the final regulation includes all five valuation methodologies that were included in the draft rules. Additionally, a method of determining the fair market value of Compulsorily Convertible Preference Shares (CCPS) for both resident and non-resident investors has been implemented. Furthermore, to aid in avoiding falling into the angel tax net, an anti-avoidance measure was expanded to non-residents, according to Business Today.
Share premiums obtained by organizations without a significant public interest are taxable as "income from other sources" under the Income Tax Act. As the majority of these organizations negotiate dilution of their ownership in the firm dependent on future valuation of the company, startups have been complaining that this impacts their capacity to raise funding.
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The government aims to ensure that future prospects of the company are also taken into account in the assessment for tax reasons by allowing flexibility in the valuation procedures.
When an unlisted firm issues shares to an investor at a price greater than its fair market value, angel tax, which is income tax at a rate of 30.6 per cent, will be assessed. The new regulations have come into effect from September 25.
Previously, angel tax was only levied on investments made by a resident investor. However, provisions to extend the angel tax to non-resident investors were introduced in Budget 2023–24 as of April 1, 2024.
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The Central Board of Direct Taxes (CBDT) stipulates that the valuation of compulsorily convertible preference shares (CCPS) can also be based on the fair market value of unquoted equity shares in accordance with the most recent amendments to Rule 11UA of I-T rules.
The rules provide that the methodologies offered will be used to calculate the fair value of the shares. Anything above the fair value of shares will be considered a "taxable premium" after deducting a 10 percent margin.
