The Central Board of Direct Taxes has made changes to the Income-Tax Rules, 1962 on September 25, 2023. The changes will help figure out the value of unquoted equity shares for taxes.
Earlier, the angel tax, which is a tax on the money received from selling shares of a startup at a price higher than their fair market value, only affected local investors. However, in the 2023-24 fiscal year (from April 2023 to March 2024), this tax now also applies to foreign investments.
Rule 11UA tells us how to figure out the fair market value of unlisted equities and compulsorily convertible preference shares, according to Pallav Pradyumn Narang, partner at CNK. This rule is important because it affects how much tax resident Indians pay on their investments if they are valued higher than the fair market value, he said.
The recent budget also removed the tax exemption for non-resident investors, meaning they will also be taxed if their investments are valued higher than the fair market value.Pallav Pradyumn Narang, Partner at CNK
There are now more ways to figure out the value of shares for non-resident investors. Before this, residents had two methods, but now non-residents have five more methods they can use. These new methods are the comparable company multiple method, probability weighted expected return method, option pricing method, milestone analysis method, and replacement cost method.
However, these new ones are only for non-resident investors, said Narang.
If a non-resident company gives money in exchange for shares in another company, the price of those shares can be seen as their fair market value for both residents and non-residents.
Since the choice of method has been left up to the assessee, if the traditional methods do not lead to an FMV that is in line with the investment price, Narang said that the idea is that at least one of the new methods should be able to provide an FMV in line with the valuation.
However, the conditions are that the FMV can't be more than the total money given by the non-resident company, and the money must be received within 90 days before or after the shares are issued.
Additionally, there are also new methods for finding the FMV of compulsorily convertible preference shares. According to the changes in Rule 11UA of the I-T rules, the valuation of compulsorily convertible preference shares and equity shares issued by unlisted startups can be based on the FMV.
Summing up the positives of the new rules, S. Sriram, partner at Lakshmikumaran and Sridharan, said that the rules also exempt from tax those companies that raise capital from notified venture capital funds, as well as certain capital raised from other investors alongside venture capital funds.
A safe harbour limit of 10% in the value vis-Ã -vis the actual price at which the shares are issued is also a welcome move, he said.
Finally, the changes bring certainty to the investors and the company, which will reduce the risk of disputes. According to Ankit Jain, partner at Ved, Jain, and Associates, the amendments address both resident and non-resident investors, aiming to level the playing field and make the regulations more equitable.
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