{"id":3205,"date":"2023-09-26T07:51:11","date_gmt":"2023-09-26T07:51:11","guid":{"rendered":"https:\/\/jammubulletin.com\/site\/?p=3205"},"modified":"2023-09-26T07:51:11","modified_gmt":"2023-09-26T07:51:11","slug":"it-notifies-angel-tax-rules-for-valuation-of-investments-in-startups","status":"publish","type":"post","link":"https:\/\/jammubulletin.com\/site\/it-notifies-angel-tax-rules-for-valuation-of-investments-in-startups\/","title":{"rendered":"IT notifies ‘Angel Tax’ rules for valuation of investments in startups"},"content":{"rendered":"

NEW DELHI: Rules\u00a0<\/span><\/span>for\u00a0<\/span><\/span>valuing\u00a0<\/span><\/span>equities\u00a0<\/span><\/span>and\u00a0<\/span><\/span>compulsorily\u00a0<\/span><\/span>convertible\u00a0<\/span><\/span>preferred\u00a0<\/span>shares\u00a0<\/span><\/span>issued\u00a0<\/span>by\u00a0<\/span><\/span>startups\u00a0<\/span><\/span>to\u00a0<\/span><\/span>resident<\/a>\u00a0<\/span><\/span>and\u00a0<\/span><\/span>non-resident\u00a0<\/span>investors\u00a0<\/span><\/span>have\u00a0<\/span>been\u00a0<\/span><\/span>made\u00a0<\/span><\/span>public\u00a0<\/span><\/span>by\u00a0<\/span><\/span>the\u00a0<\/span>income\u00a0<\/span>tax<\/a>\u00a0<\/span>department.<\/span><\/span><\/span> <\/span><\/span><\/span>The\u00a0<\/span>Central\u00a0<\/span>Board\u00a0<\/span><\/span>of\u00a0<\/span><\/span>Direct\u00a0<\/span>Taxes\u00a0<\/span>(CBDT)\u00a0<\/span><\/span>stipulates\u00a0<\/span><\/span>that\u00a0<\/span><\/span>the\u00a0<\/span>valuation\u00a0<\/span><\/span>of\u00a0<\/span><\/span>compulsorily\u00a0<\/span><\/span>convertible\u00a0<\/span><\/span>preference\u00a0<\/span>shares\u00a0<\/span><\/span>(CCPS)\u00a0<\/span><\/span>can\u00a0<\/span>also\u00a0<\/span>be\u00a0<\/span><\/span>based\u00a0<\/span>on\u00a0<\/span><\/span>the\u00a0<\/span>fair\u00a0<\/span>market\u00a0<\/span>value\u00a0<\/span><\/span>of\u00a0<\/span><\/span>unquoted\u00a0<\/span><\/span>equity\u00a0<\/span>shares\u00a0<\/span><\/span>in\u00a0<\/span>accordance\u00a0<\/span><\/span>with\u00a0<\/span>the\u00a0<\/span><\/span>amendments\u00a0<\/span><\/span>to\u00a0<\/span><\/span>Rule\u00a0<\/span><\/span>11UA\u00a0<\/span><\/span>of\u00a0<\/span><\/span>I-T\u00a0<\/span><\/span>rules,\u00a0<\/span><\/span>which\u00a0<\/span><\/span>take\u00a0<\/span><\/span>effect\u00a0<\/span>on\u00a0<\/span><\/span>September\u00a0<\/span>25.<\/span><\/span><\/span> <\/span><\/span><\/span>The\u00a0<\/span>five\u00a0<\/span><\/span>new\u00a0<\/span><\/span>valuation\u00a0<\/span><\/span>techniques\u2014Comparable\u00a0<\/span><\/span>Company\u00a0<\/span><\/span>Multiple\u00a0<\/span><\/span>Method,\u00a0<\/span><\/span>Probability\u00a0<\/span><\/span>Weighted\u00a0<\/span><\/span>Expected\u00a0<\/span>Return\u00a0<\/span><\/span>Method,\u00a0<\/span><\/span>Option\u00a0<\/span><\/span>Pricing\u00a0<\/span><\/span>Method,\u00a0<\/span><\/span>Milestone\u00a0<\/span><\/span>Analysis\u00a0<\/span><\/span>Method,\u00a0<\/span><\/span>and\u00a0<\/span><\/span>Replacement\u00a0<\/span><\/span>Cost\u00a0<\/span><\/span>Method\u2014that\u00a0<\/span><\/span>were\u00a0<\/span>included\u00a0<\/span><\/span>in\u00a0<\/span>the\u00a0<\/span><\/span>draught\u00a0<\/span><\/span>rules\u00a0<\/span><\/span>for\u00a0<\/span><\/span>non-residents’\u00a0<\/span><\/span>review\u00a0<\/span><\/span>are\u00a0<\/span>also\u00a0<\/span>retained\u00a0<\/span><\/span>in\u00a0<\/span><\/span>the\u00a0<\/span>amended\u00a0<\/span><\/span>rules.<\/span><\/span><\/span><\/span><\/span><\/span>The\u00a0<\/span>amendments\u00a0<\/span><\/span>to\u00a0<\/span><\/span>Rule\u00a0<\/span><\/span>11UA\u00a0<\/span><\/span>of\u00a0<\/span><\/span>the\u00a0<\/span>Indian\u00a0<\/span>Income\u00a0<\/span>Tax\u00a0<\/span>Act,\u00a0<\/span><\/span>according\u00a0<\/span>to\u00a0<\/span><\/span>Nangia\u00a0<\/span><\/span>&\u00a0<\/span><\/span>Co\u00a0<\/span><\/span>LLP\u00a0<\/span><\/span>Partner\u00a0<\/span><\/span>Amit\u00a0<\/span>Agarwal,\u00a0<\/span><\/span>result\u00a0<\/span>in\u00a0<\/span><\/span>positive\u00a0<\/span>changes\u00a0<\/span><\/span>by\u00a0<\/span>giving\u00a0<\/span><\/span>taxpayers\u00a0<\/span><\/span>flexibility\u00a0<\/span><\/span>through\u00a0<\/span><\/span>a\u00a0<\/span>variety\u00a0<\/span><\/span>of\u00a0<\/span><\/span>valuation\u00a0<\/span><\/span>methods,\u00a0<\/span><\/span>simplifying\u00a0<\/span><\/span>the\u00a0<\/span>valuation\u00a0<\/span>date\u00a0<\/span><\/span>consideration,\u00a0<\/span><\/span>encouraging\u00a0<\/span><\/span>venture\u00a0<\/span>capital\u00a0<\/span>investments,\u00a0<\/span><\/span>facilitating\u00a0<\/span><\/span>investments\u00a0<\/span><\/span>from\u00a0<\/span><\/span>notified\u00a0<\/span><\/span>entities,\u00a0<\/span><\/span>providing\u00a0<\/span><\/span>clarity\u00a0<\/span><\/span>on\u00a0<\/span><\/span>CCPS,\u00a0<\/span><\/span>and\u00a0<\/span>promoting\u00a0<\/span><\/span>foreign\u00a0<\/span>investments.<\/span><\/span><\/span> <\/span><\/span><\/span>“The\u00a0<\/span><\/span>inclusion\u00a0<\/span><\/span>of\u00a0<\/span><\/span>a\u00a0<\/span>tolerance\u00a0<\/span><\/span>threshold\u00a0<\/span><\/span>for\u00a0<\/span><\/span>minor\u00a0<\/span><\/span>valuation\u00a0<\/span><\/span>discrepancies\u00a0<\/span><\/span>further\u00a0<\/span>enhances\u00a0<\/span><\/span>the\u00a0<\/span>efficiency\u00a0<\/span><\/span>and\u00a0<\/span><\/span>fairness\u00a0<\/span><\/span>of\u00a0<\/span><\/span>tax\u00a0<\/span><\/span>assessments,\u00a0<\/span><\/span>ultimately\u00a0<\/span>benefiting\u00a0<\/span><\/span>both\u00a0<\/span>taxpayers\u00a0<\/span><\/span>and\u00a0<\/span><\/span>the\u00a0<\/span>government.”<\/span><\/span><\/span><\/span><\/span><\/span>These\u00a0<\/span>modifications\u00a0<\/span><\/span>give\u00a0<\/span><\/span>taxpayers\u00a0<\/span><\/span>access\u00a0<\/span>to\u00a0<\/span><\/span>a\u00a0<\/span>wider\u00a0<\/span>variety\u00a0<\/span><\/span>of\u00a0<\/span><\/span>valuation\u00a0<\/span><\/span>techniques,\u00a0<\/span><\/span>including\u00a0<\/span><\/span>those\u00a0<\/span>that\u00a0<\/span><\/span>are\u00a0<\/span>widely\u00a0<\/span>accepted,\u00a0<\/span><\/span>luring\u00a0<\/span><\/span>foreign\u00a0<\/span>investment\u00a0<\/span><\/span>and\u00a0<\/span>promoting\u00a0<\/span><\/span>clarity.<\/span><\/span><\/span><\/span><\/span><\/span>Additionally,\u00a0<\/span><\/span>the\u00a0<\/span><\/span>notified\u00a0<\/span><\/span>final\u00a0<\/span><\/span>regulation\u00a0<\/span><\/span>adds\u00a0<\/span><\/span>a\u00a0<\/span>new\u00a0<\/span><\/span>sub-clause\u00a0<\/span><\/span>that\u00a0<\/span><\/span>specifically\u00a0<\/span>mentions\u00a0<\/span><\/span>CCPS,\u00a0<\/span><\/span>according\u00a0<\/span>to\u00a0<\/span><\/span>Agarwal.<\/span><\/span><\/span> <\/span><\/span><\/span>According\u00a0<\/span>to\u00a0<\/span><\/span>Amit\u00a0<\/span><\/span>Maheshwari,\u00a0<\/span><\/span>partner\u00a0<\/span><\/span>at\u00a0<\/span><\/span>AKM\u00a0<\/span><\/span>Global\u00a0<\/span><\/span>Tax,\u00a0<\/span><\/span>the\u00a0<\/span>new\u00a0<\/span><\/span>angel\u00a0<\/span><\/span>tax\u00a0<\/span>laws\u00a0<\/span><\/span>have\u00a0<\/span>very\u00a0<\/span><\/span>well\u00a0<\/span><\/span>addressed\u00a0<\/span><\/span>a\u00a0<\/span>crucial\u00a0<\/span>feature\u00a0<\/span><\/span>of\u00a0<\/span>the\u00a0<\/span><\/span>CCPS\u00a0<\/span><\/span>valuation\u00a0<\/span><\/span>mechanism,\u00a0<\/span><\/span>which\u00a0<\/span><\/span>was\u00a0<\/span>not\u00a0<\/span><\/span>the\u00a0<\/span>case\u00a0<\/span><\/span>in\u00a0<\/span>the\u00a0<\/span>past\u00a0<\/span><\/span>given\u00a0<\/span>that\u00a0<\/span><\/span>the\u00a0<\/span>majority\u00a0<\/span><\/span>of\u00a0<\/span><\/span>investments\u00a0<\/span><\/span>made\u00a0<\/span>in\u00a0<\/span><\/span>India\u00a0<\/span><\/span>by\u00a0<\/span><\/span>VC\u00a0<\/span>funds\u00a0<\/span><\/span>are\u00a0<\/span>made\u00a0<\/span><\/span>only\u00a0<\/span><\/span>through\u00a0<\/span>the\u00a0<\/span><\/span>CCPS\u00a0<\/span><\/span>method.<\/span><\/span><\/span> <\/span><\/span><\/span>Maheshwari\u00a0<\/span><\/span>continued,\u00a0<\/span><\/span>“The\u00a0<\/span><\/span>extending\u00a0<\/span><\/span>of\u00a0<\/span><\/span>10%\u00a0<\/span><\/span>safe\u00a0<\/span>harbour\u00a0<\/span><\/span>to\u00a0<\/span><\/span>CCPS\u00a0<\/span><\/span>investments\u00a0<\/span><\/span>as\u00a0<\/span>it\u00a0<\/span><\/span>was\u00a0<\/span>previously\u00a0<\/span><\/span>intended\u00a0<\/span><\/span>for\u00a0<\/span><\/span>equity\u00a0<\/span>shares\u00a0<\/span><\/span>will\u00a0<\/span>give\u00a0<\/span><\/span>required\u00a0<\/span><\/span>margin\u00a0<\/span><\/span>of\u00a0<\/span>safety\u00a0<\/span><\/span>for\u00a0<\/span><\/span>handling\u00a0<\/span><\/span>foreign\u00a0<\/span>exchange\u00a0<\/span><\/span>volatility\u00a0<\/span><\/span>and\u00a0<\/span><\/span>is\u00a0<\/span>a\u00a0<\/span><\/span>positive\u00a0<\/span><\/span>measure.<\/span><\/span><\/span><\/span><\/span><\/span>The\u00a0<\/span>CBDT\u00a0<\/span><\/span>released\u00a0<\/span><\/span>draught\u00a0<\/span><\/span>regulations\u00a0<\/span><\/span>on\u00a0<\/span><\/span>the\u00a0<\/span>valuation\u00a0<\/span><\/span>of\u00a0<\/span><\/span>funding\u00a0<\/span><\/span>in\u00a0<\/span><\/span>unlisted\u00a0<\/span><\/span>and\u00a0<\/span><\/span>unrecognised\u00a0<\/span><\/span>businesses\u00a0<\/span><\/span>for\u00a0<\/span><\/span>income\u00a0<\/span>tax\u00a0<\/span><\/span>purposes\u00a0<\/span><\/span>in\u00a0<\/span><\/span>May\u00a0<\/span><\/span>and\u00a0<\/span><\/span>solicited\u00a0<\/span><\/span>public\u00a0<\/span>feedback\u00a0<\/span><\/span>on\u00a0<\/span><\/span>them.\u00a0<\/span><\/span>These\u00a0<\/span>regulations\u00a0<\/span><\/span>are\u00a0<\/span>known\u00a0<\/span><\/span>as\u00a0<\/span>the\u00a0<\/span><\/span>“Angel\u00a0<\/span><\/span>Tax.”<\/span><\/span><\/span> <\/span><\/span><\/span>The\u00a0<\/span><\/span>revised\u00a0<\/span>regulations\u00a0<\/span><\/span>are\u00a0<\/span>intended\u00a0<\/span><\/span>to\u00a0<\/span>close\u00a0<\/span><\/span>the\u00a0<\/span>discrepancy\u00a0<\/span><\/span>between\u00a0<\/span><\/span>the\u00a0<\/span>Income\u00a0<\/span>Tax\u00a0<\/span><\/span>and\u00a0<\/span><\/span>the\u00a0<\/span>FEMA\u00a0<\/span><\/span>regulations.<\/span><\/span><\/span> <\/span><\/span><\/span>Businesses\u00a0<\/span><\/span>paid\u00a0<\/span><\/span>taxes\u00a0<\/span><\/span>in\u00a0<\/span>addition\u00a0<\/span><\/span>to\u00a0<\/span>their\u00a0<\/span><\/span>fair\u00a0<\/span><\/span>market\u00a0<\/span>value.<\/span><\/span><\/span> <\/span><\/span><\/span>A\u00a0<\/span>tax\u00a0<\/span><\/span>known\u00a0<\/span><\/span>as\u00a0<\/span>an\u00a0<\/span><\/span>angel\u00a0<\/span><\/span>tax\u00a0<\/span><\/span>was\u00a0<\/span>used\u00a0<\/span><\/span>to\u00a0<\/span>describe\u00a0<\/span><\/span>this.<\/span><\/span><\/span> <\/span><\/span><\/span>According\u00a0<\/span><\/span>to\u00a0<\/span>the\u00a0<\/span><\/span>Finance\u00a0<\/span><\/span>Act\u00a0<\/span>of\u00a0<\/span><\/span>2023,\u00a0<\/span><\/span>taxes\u00a0<\/span><\/span>will\u00a0<\/span>be\u00a0<\/span><\/span>applied\u00a0<\/span><\/span>to\u00a0<\/span>such\u00a0<\/span><\/span>investments\u00a0<\/span><\/span>above\u00a0<\/span><\/span>the\u00a0<\/span>FMV\u00a0<\/span><\/span>whether\u00a0<\/span><\/span>the\u00a0<\/span>investor\u00a0<\/span><\/span>is\u00a0<\/span>a\u00a0<\/span><\/span>resident\u00a0<\/span><\/span>or\u00a0<\/span><\/span>a\u00a0<\/span>non-resident.<\/span><\/span><\/span> <\/span><\/span><\/span>Concerns\u00a0<\/span><\/span>have\u00a0<\/span>been\u00a0<\/span><\/span>raised\u00a0<\/span><\/span>over\u00a0<\/span><\/span>the\u00a0<\/span>methods\u00a0<\/span><\/span>used\u00a0<\/span><\/span>to\u00a0<\/span>determine\u00a0<\/span><\/span>fair\u00a0<\/span>market\u00a0<\/span>value\u00a0<\/span><\/span>under\u00a0<\/span><\/span>two\u00a0<\/span>different\u00a0<\/span><\/span>regulations\u00a0<\/span><\/span>following\u00a0<\/span>changes\u00a0<\/span><\/span>to\u00a0<\/span>the\u00a0<\/span><\/span>Finance\u00a0<\/span><\/span>Act.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\"IT
IT notifies ‘Angel Tax’ rules for valuation of investments in startups<\/figcaption><\/figure>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

NEW DELHI: Rules\u00a0for\u00a0valuing\u00a0equities\u00a0and\u00a0compulsorily\u00a0convertible\u00a0preferred\u00a0shares\u00a0issued\u00a0by\u00a0startups\u00a0to\u00a0resident\u00a0and\u00a0non-resident\u00a0investors\u00a0have\u00a0been\u00a0made\u00a0public\u00a0by\u00a0the\u00a0income\u00a0tax\u00a0department. The\u00a0Central\u00a0Board\u00a0of\u00a0Direct\u00a0Taxes\u00a0(CBDT)\u00a0stipulates\u00a0that\u00a0the\u00a0valuation\u00a0of\u00a0compulsorily\u00a0convertible\u00a0preference\u00a0shares\u00a0(CCPS)\u00a0can\u00a0also\u00a0be\u00a0based\u00a0on\u00a0the\u00a0fair\u00a0market\u00a0value\u00a0of\u00a0unquoted\u00a0equity\u00a0shares\u00a0in\u00a0accordance\u00a0with\u00a0the\u00a0amendments\u00a0to\u00a0Rule\u00a011UA\u00a0of\u00a0I-T\u00a0rules,\u00a0which\u00a0take\u00a0effect\u00a0on\u00a0September\u00a025. The\u00a0five\u00a0new\u00a0valuation\u00a0techniques\u2014Comparable\u00a0Company\u00a0Multiple\u00a0Method,\u00a0Probability\u00a0Weighted\u00a0Expected\u00a0Return\u00a0Method,\u00a0Option\u00a0Pricing\u00a0Method,\u00a0Milestone\u00a0Analysis\u00a0Method,\u00a0and\u00a0Replacement\u00a0Cost\u00a0Method\u2014that\u00a0were\u00a0included\u00a0in\u00a0the\u00a0draught\u00a0rules\u00a0for\u00a0non-residents’\u00a0review\u00a0are\u00a0also\u00a0retained\u00a0in\u00a0the\u00a0amended\u00a0rules.The\u00a0amendments\u00a0to\u00a0Rule\u00a011UA\u00a0of\u00a0the\u00a0Indian\u00a0Income\u00a0Tax\u00a0Act,\u00a0according\u00a0to\u00a0Nangia\u00a0&\u00a0Co\u00a0LLP\u00a0Partner\u00a0Amit\u00a0Agarwal,\u00a0result\u00a0in\u00a0positive\u00a0changes\u00a0by\u00a0giving\u00a0taxpayers\u00a0flexibility\u00a0through\u00a0a\u00a0variety\u00a0of\u00a0valuation\u00a0methods,\u00a0simplifying\u00a0the\u00a0valuation\u00a0date\u00a0consideration,\u00a0encouraging\u00a0venture\u00a0capital\u00a0investments,\u00a0facilitating\u00a0investments\u00a0from\u00a0notified\u00a0entities,\u00a0providing\u00a0clarity\u00a0on\u00a0CCPS,\u00a0and\u00a0promoting\u00a0foreign\u00a0investments. “The\u00a0inclusion\u00a0of\u00a0a\u00a0tolerance\u00a0threshold\u00a0for\u00a0minor\u00a0valuation\u00a0discrepancies\u00a0further\u00a0enhances\u00a0the\u00a0efficiency\u00a0and\u00a0fairness\u00a0of\u00a0tax\u00a0assessments,\u00a0ultimately\u00a0benefiting\u00a0both\u00a0taxpayers\u00a0and\u00a0the\u00a0government.”These\u00a0modifications\u00a0give\u00a0taxpayers\u00a0access\u00a0to\u00a0a\u00a0wider\u00a0variety\u00a0of\u00a0valuation\u00a0techniques,\u00a0including\u00a0those\u00a0that\u00a0are\u00a0widely\u00a0accepted,\u00a0luring\u00a0foreign\u00a0investment\u00a0and\u00a0promoting\u00a0clarity.Additionally,\u00a0the\u00a0notified\u00a0final\u00a0regulation\u00a0adds\u00a0a\u00a0new\u00a0sub-clause\u00a0that\u00a0specifically\u00a0mentions\u00a0CCPS,\u00a0according\u00a0to\u00a0Agarwal. According\u00a0to\u00a0Amit\u00a0Maheshwari,\u00a0partner\u00a0at\u00a0AKM\u00a0Global\u00a0Tax,\u00a0the\u00a0new\u00a0angel\u00a0tax\u00a0laws\u00a0have\u00a0very\u00a0well\u00a0addressed\u00a0a\u00a0crucial\u00a0feature\u00a0of\u00a0the\u00a0CCPS\u00a0valuation\u00a0mechanism,\u00a0which\u00a0was\u00a0not\u00a0the\u00a0case\u00a0in\u00a0the\u00a0past\u00a0given\u00a0that\u00a0the\u00a0majority\u00a0of\u00a0investments\u00a0made\u00a0in\u00a0India\u00a0by\u00a0VC\u00a0funds\u00a0are\u00a0made\u00a0only\u00a0through\u00a0the\u00a0CCPS\u00a0method. 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