CBDT issues draft valuation rules for angel tax provisions for public consultation

This Tax Alert explains the public consultation document issued by the Central Board of Direct of Taxes (CBDT)   which proposes to amend valuation rules relevant for “angel tax” provisions. 

The Finance Act 2023 amended Section 56(2)(viib) of the Income tax Act 1961, which taxes excessive premium received by a closely held company (CHC) from a resident (popularly known as “angel tax” provision) to include share investment made by a non-resident (NR), with effect from tax year 2023-24. The stakeholders raised concerns on increase in valuation disputes due to such an amendment. In response to such concerns, the CBDT announced a slew of reliefs from “angel tax” vide Press Release dated 19 May 2023 .  The CBDT also issued two Notifications on 24 May 2023  as announced in the Press Release for (a) notifying the class of NR investors whose investment shall be excluded from “angel tax” and (b) extending the current reliefs for investment by residents in start-ups registered with DPIIT  to NR investors.

Following up on the announcement in Press Release regarding modification of valuation rule for computing Fair Market Value (FMV), the CBDT has now issued draft of amended Rule 11UA for public comments.

The existing Rule 11UA prescribes two methods (viz. NAV  or DCF ) for determining the FMV of equity shares issued to resident investors. The CBDT proposes to include five more valuation methods for issue of equity shares to NR investors viz. Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method and Replacement Cost Methods. 

Furthermore, it proposes to introduce price matching facility for both resident and NR investors. In terms of such price matching facility, the price at which equity shares are issued by CHC to notified NR entities shall be adopted as FMV for the purposes of benchmarking equity investments by both resident and NR investors, subject to compliance of certain conditions.

Existing Rule 11UA requires merchant banker DCF valuation report as on the date of issue of shares. The CBDT proposes to provide flexibility by making valuation report issued up to 90 days prior to the date of issue of equity shares acceptable for computing FMV for investments by both resident and NR investors.

Lastly, in order to factor in the variation in price due to various factors, the CBDT proposes to introduce safe harbor limit of 10% for valuation of equity shares which can be availed by both resident and NR investors.

The CBDT has sought public comments on the above referred draft of amended Rule 11UA by 5 June 2023.