foreign investment

The Income Tax (IT) released final valuation regulations in order to determine whether foreign investments into unlisted shares in India are subject to a premium that is liable to a tax under the provisions of the angel tax.

The modification into the Rule 11UA by the Income-tax (Twenty First Amendment) Rules, 2023, came into effect from Monday.

The rules provide that the methodologies offered will be used to calculate the fair value of the shares. After deducting a 10 per cent safe harbour buffer, everything beyond will be considered a taxable premium. A method for determining the fair market value of Compulsorily Convertible Preference Shares (CCPS) for investment from residents and non-resident residents is now included in the updated rules.

Mr. Gaurav VK Singhvi, Co-Founder of We Founder Circle commented on the amendment that availability of multiple valuation methods simplifies the process and removes some of the previous constraints. This is particularly beneficial for startups and investors as it eases the consideration of valuation dates and encourages venture capital investments.

“It provides relief to startups and investors by reducing the tax burden and simplifying the taxation of such investments. This significant change in policy provides much-needed relief by reducing the tax burden on both startups and investors. Moreover, it streamlines the taxation process, fostering a more favorable environment for investment and innovation,” he said.

The ministry’s notification of the final rules is aiming to give investors clarity and a range of valuation options so that the value of unlisted shares can be accurately determined. It is also aiming to prevent investors from falling into the angel tax net, an anti-avoidance measure that was expanded to non-residents in Finance Act 2023.

Startups can now secure funds through equity and convertible preference shares within these specified limits without being subjected to the angel tax, he added further.

Share premiums obtained by organisations without a significant public interest are taxable as “income from other sources” under the Income Tax Act. As the majority of these organisations negotiate dilution of their ownership in the firm dependent on future valuation of the company, startups have been complaining that this impacts their capacity to raise funding. The government is aiming to ensure that future prospects of the company are also taken into account in the assessment for tax reasons by allowing flexibility in the valuation procedures.