I-T dept to release draft rules for foreign investment in unlisted firms

The Income Tax department will come out with draft rules within the next 8-10 days to specify the class of investors and norms of valuation of foreign investment in unlisted companies, an official said on Tuesday.

The Finance Act, 2023, has amended Section 56(2)(viib) of the I-T Act, thereby bringing overseas investment in unlisted closely held companies, except DPIIT-recognised startups, under the tax net.

The I-T department will notify the final rules on the so-called angel tax after seeking stakeholder comments on the draft rules, the official said.

"The draft rules are expected in the next 8-10 days. Preliminary stakeholder consultation on the subject has been done," the official said.

The draft valuation rules would provide for ascertaining the fair market value (FMV) of shares of unlisted companies to levy tax on non-resident investments, an official said.

The modification in valuation rules is needed as I-T Act and FEMA provide different methodologies for calculating the FMV of shares of unlisted companies.

The startup and venture capital industry has sought exemption for certain overseas investor classes. The ministry in the rules is expected to specify to which investor class these modified tax rules would be applicable.

However, no tax would be levied on investments in startups which meet the prescribed norms and are recognised by the Department for Promotion of Industry and internal trade (DPIIT).

Post the amendments proposed in the Finance Bill, concerns have been raised over the methodology of calculation of fair market value under two different laws.