BCI rules do not permit advertisement or solicitation by advocates or their firms. This website is for information only. See Disclaimer

CBDT notifies amendments to Rule 11UA regarding Angel Tax

Featured in

“Angel Tax” or Section 56(2)(viib) of the Income Tax Act, 1961 (ITA) is an anti-abuse measure introduced in 2012 as a means of “preventing generation and circulation of unaccounted funds.” In the context of securities market, a high share premium can be the consequence of perfectly valid, legal, and commercial decisions taken by the Company. However, it is frowned upon by the revenue department and many startups/institutions have received notices. Angel tax is susceptible to be levied when unlisted companies issue shares at prices higher than their fair market value.

The Central Board of Direct Taxes, Ministry of Finance (CBDT) has notified Income-tax (Twenty first Amendment) Rules, 2023 amending Rule 11UA of the Income-tax Rules, 1962. These revisions impact the computation of the fair market value of unquoted equity shares for the purposes of Section 56(2)(viib) of the ITA.

In line with the Finance Act, 2023, which altered section 56(2)(viib) of the Act, these amendments now encompass consideration received from non-residents for the issuance of shares. This means that if such consideration surpasses the Fair Market Value (FMV) of the shares, it becomes subject to income tax under the head “Income from other sources.”

The updated Rule 11UA introduces five additional valuation methods for non-resident investors, expanding upon the existing Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods. Sub-rule (2)(A)(d) specifies that a merchant banker can determine the fair market value of unquoted equity shares using methods like the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Methods.

Furthermore, if a company receives consideration for issuing unquoted equity shares from a notified non-resident entity, the price of those equity shares can be considered the FMV, provided it doesn’t exceed the aggregate consideration received from the notified entity. This consideration must be received by the company within ninety days before or after the date of the share issuance, as per the valuation. The updated rule also sets a safe harbor threshold of a 10% variation in value.

Therefore, the rules outline 5 approaches for NRIs and utilize the DCF and NAV methods for resident investors. They suggest a 10% safe harbor adjustment to accommodate variables influencing valuations of unquoted equity shares. Furthermore, the rules specify specific exemptions tailored to different investor groups. Hope this will bring certain clarity which is a welcome move.

For those interested, a copy of the Gazette notification dated September 25, 2023 is enclosed. We extend an invitation to securities law enthusiasts to share their academic insights on this.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com

Latest RegPost