New angel tax rules bring clarity to valuing startup investments

  • September 28, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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New angel tax rules bring clarity to valuing startup investments

Subject : Economy

Section: Capital Market

In News: The amended rules are aimed at bridging the gap between the rules outlined in FEMA and the Income Tax.

Key Points:

  • The Income Tax department has notified rules for valuation of equity and compulsorily convertible preferable shares issued by startups to resident and non-resident investors.
  • As per the changes in Rule 11UA of I-T rules, which comes into effect from September 25, the Central Board of Direct Taxes (CBDT) provides that the valuation of compulsorily convertible preference shares (CCPS) can also be based on the fair market value of unquoted equity shares.
  • The change is significant as most of the investments in India by VC funds is through the CCPS route only.
  • Extension of 10% safe harbour to CCPS investments as it was earlier meant for equity shares will give necessary margin of safety for taking care of foreign exchange fluctuations.

What are the benefits:

  • 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, incentivising venture capital investments, facilitating investments from notified entities, providing clarity on CCPS and encouraging foreign investments.
Angel Tax

  • The CBDT had in May come out with draft rules on valuation of funding in unlisted and unrecognised startups for levying income tax, commonly termed as ‘Angel Tax’ and had invited public comments on it.
  • The amended rules are aimed at bridging the gap between the rules outlined in FEMA and the Income Tax.
  • So far, only investments by domestic investors or residents in closely held companies or unlisted firms were taxed over and above the fair market value. This was commonly referred to as an angel tax.
  • The Fnance Act, 2023 has said that such investments over and above the FMV will be taxed irrespective of whether the investor is a resident or non-resident.
  • Post the amendments in the Finance Act, concerns have been raised over the methodology of calculation of fair market value under two different laws. This amendment aims to correct that.

Note: Angel investors are wealthy private investors focused on financing small business ventures in exchange for equity. Unlike a venture capital firm that uses an investment fund, angels use their own net worth.

economy New angel tax rules bring clarity to valuing startup investments