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CBDT widens valuation norms for angel tax to bring clarity, end disputes

Exempts govt entities, banks, insurance firms, FPIs from provision

Angel Tax

The apex body proposed to include five more valuation methods, available for non-resident investors, in addition to the DCF and NAV methods of valuation

Shrimi Choudhary New Delhi

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The Central Board of Direct Taxes (CBDT) on Friday widened the valuation methods under the angel tax provision on investment by foreign investors in start-ups to bring clarity and end tax disputes.

Further, it exempted certain categories of investors — such as those registered with regulatory authorities and government-owned entities whose chances of circulating unaccounted money are low — from the said tax provision.

Among the proposed valuation norms, it has suggested valuation by a Securities and Exchange Board of India-registered category-I merchant banker using any internationally accepted pricing methodology applied on an arm’s length basis, if it is of a date not more than 90 days prior to the date of issue of shares that are the subject matter of valuation.

Further, to account for forex fluctuations, bidding processes and variations in other economic indicators, etc, which may affect the valuation of the unquoted equity shares during multiple rounds of investment, it proposed providing a safe harbour of 10 per cent variation in value.

The draft rules will be shared for public comments for 10 days, after which these will be notified.

Under Section 56(2)(vii)(b) of the Income Tax Act, if a closely held company issues shares at a price exceeding fair market value (FMV), computed in accordance with the prescribed methodology, the difference is to be taxed as income from other sources.

Notifying the exempted entities, the CBDT said government and related investors such as central banks, sovereign wealth funds, international or multilateral organisations or agencies, including entities where direct or indirect ownership of the government is 75 per cent or more, are exempted.

It also exempted banks or entities involved in the insurance business, where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident. Apart from these, endowment funds associated with a university, hospitals or charities, pension funds created or established under the law of the foreign country or specified territory, have also been kept out.

Broad-based pooled investment vehicles or funds where the number of investors in such a vehicle or fund is more than 50 and such fund is not a hedge fund or a fund that employs diverse or complex trading strategies are also the part of the exempted list.

“Rule 11UA currently prescribes two valuation methods with respect to valuation of shares namely, Discounted Cash Flow (DCF) and Net Asset Value (NAV) method for resident investors,” the CBDT release said.

The apex body proposed to include five more valuation methods, available for non-resident investors, in addition to the DCF and NAV methods of valuation.

Further, where any consideration is received by a company for issue of shares from any non-resident entity notified by the central government, the price of the equity shares corresponding to such consideration may be taken as the FMV of the equity shares for resident and non-resident investors with certain conditions.

One, to the extent the consideration from such FMV does not exceed the aggregate consideration that is received from the  notified entity and the said consideration should be within a period of 90 days of the date of issue of shares which are the subject matter of valuation.         

On similar lines, price matching for resident and non-resident investors would be available with reference to investment by venture capital funds or specified funds.

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First Published: May 19 2023 | 10:19 PM IST

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