NEW DELHI: Rules for valuing equities and compulsorily convertible preferred shares issued by startups to resident and non-resident investors have been made public by the income tax department. The Central Board of Direct Taxes (CBDT) stipulates that the valuation of compulsorily convertible preference shares (CCPS) can also be based on the fair market value of unquoted equity shares in accordance with the amendments to Rule 11UA of I-T rules, which take effect on September 25. The five new valuation techniques—Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method—that were included in the draught rules for non-residents’ review are also retained in the amended rules.The amendments to Rule 11UA of the Indian Income Tax Act, according to Nangia & Co LLP Partner Amit Agarwal, result in positive changes by giving taxpayers flexibility through a variety of valuation methods, simplifying the valuation date consideration, encouraging venture capital investments, facilitating investments from notified entities, providing clarity on CCPS, and promoting foreign investments. “The inclusion of a tolerance threshold for minor valuation discrepancies further enhances the efficiency and fairness of tax assessments, ultimately benefiting both taxpayers and the government.”These modifications give taxpayers access to a wider variety of valuation techniques, including those that are widely accepted, luring foreign investment and promoting clarity.Additionally, the notified final regulation adds a new sub-clause that specifically mentions CCPS, according to Agarwal. According to Amit Maheshwari, partner at AKM Global Tax, the new angel tax laws have very well addressed a crucial feature of the CCPS valuation mechanism, which was not the case in the past given that the majority of investments made in India by VC funds are made only through the CCPS method. Maheshwari continued, “The extending of 10% safe harbour to CCPS investments as it was previously intended for equity shares will give required margin of safety for handling foreign exchange volatility and is a positive measure.The CBDT released draught regulations on the valuation of funding in unlisted and unrecognised businesses for income tax purposes in May and solicited public feedback on them. These regulations are known as the “Angel Tax.” The revised regulations are intended to close the discrepancy between the Income Tax and the FEMA regulations. Businesses paid taxes in addition to their fair market value. A tax known as an angel tax was used to describe this. According to the Finance Act of 2023, taxes will be applied to such investments above the FMV whether the investor is a resident or a non-resident. Concerns have been raised over the methods used to determine fair market value under two different regulations following changes to the Finance Act.
