Call for Inputs: Proposed changes to Income Tax Rules in respect of Angel Tax

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Call for Inputs: Proposed changes to Income Tax Rules in respect of Angel Tax

Garima Prakash

@GarimaP

May 29, 2023

Public Policy

226

As you might be aware, amendments to the angel tax provision (section 56(2)(viib)) under the Income Tax Act have been introduced. As per the new provision, investments above fair market value received from certain entities (such as, central banks, sovereign wealth funds, insurance companies, SEBI registered FPIs, foreign pension funds, pooled investment vehicles etc. ) and from certain notified jurisdictions (such as, US, UK, Australia, Japan, EU etc.) will not be subject to income tax. This is a favourable step towards reducing the tax liability on start-ups in India.

Thereafter, on May 26, 2023, Central Board of Direct Taxes has proposed changes to the Income tax Act with respect to the valuation methods for start-ups:

Inclusion of 5 more valuation methods for non-resident investors, in addition to Discounted Cash Flow (DCF) and Net Assets Value (NAV) method. This will give more flexibility in valuations by start-ups. The methods are:

Comparable Company Multiple Method;
Probability Weighted Expected Return Method;
Option Pricing Method;
Milestone Analysis Method;
Replacement Cost Methods;

This will help to align valuation mechanism with the valuation mythologies prescribed under foreign exchange control regulations.

Where any consideration is received by a company from any non-resident entity notified by the Central Government, the price of the equity shares corresponding to the consideration may be taken as the FMV of the equity shares for resident and non-resident investors, subject to 2 conditions:

To the extent that the consideration from such FMV does not exceed the aggregate consideration that is received from the notified entity.
the consideration has been received by the company from the notified entity within 90 days from the date of issue of the shares which are subject to the matter of valuation

The detailed draft rules are attached for reference. If there are any inputs or suggestions on the abovementioned proposed amendments, please write to us by June 1, 2023.

Startups angel tax Investment

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Garima Prakash

Manager, Public Policy and Government Affairs

Reach out to me for all things policy about e-commerce, international trade, export controls, start-ups and fintech

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