The Finance Act, 2023 extended the applicability of Section 56(2)(viib) of the Income-tax Act...

4 October 2023 CBDT notifies final valuation rules for Angel Tax provisions The Finance Act, 2023 extended the applicability of Section 56(2)(viib) of the Income-tax Act, 1961 (the Act) even to the consideration received from non-residents in excess of Fair Market Value (FMV) for issuance of shares of unlisted companies. This is commonly referred to as 'Angel Tax.' Pursuant to the amendment, the Central Board of Direct Taxes (CBDT) earlier released a press release1 followed by draft Rules2 for public consultation proposing several changes to the valuation mechanisms and related provisions as laid down under Rule 11UA of the Income-tax Rules, 1962 (Rules), which we have summarized here. Post public comments, the CBDT has notified3 the Income-tax (Twenty-First Amendment) Rules, 2023, amending Rule 11UA. The final Rule retains the changes that were proposed vide the press release and the draft Rules. Notably, the following is the summary of the changes notified in the Rule 11UA: Five more valuation methods were introduced for determining the FMV of unlisted shares issued to non-resident investors. Where a company receives consideration for issuing shares from a notified entity within 90 days, the issue price of those entities may be considered FMV. On similar lines, price matching for resident and non-resident investors would be available with reference to investment by Venture Capital Funds or Specified Funds. Relaxation is provided for the issuance of shares by start-ups. A safe harbor of 10% variation in issue price to account for multiple rounds, which may affect the valuation of the unquoted equity shares during multiple rounds of investment. The valuation report provided by a Merchant Banker would be acceptable if it is of a date not more than 90 days prior to the date of issue of shares. In furtherance to the above, the amended Rule provides for a separate valuation mechanism for Compulsorily Convertible Preference Shares (CCPS) issued to both residents and non-residents. Subject to the exception of the Net Asset Value (NAV) method, the mechanisms for determining the FMV of CCPS are aligned with the mechanisms as made applicable to equity shares. There is also an option provided to adopt FMV of unquoted equity shares for determining FMV. CBDT Press Release dated 19 May 2023 F. No. 370142/9/2023-TPL(part-I) CBDT Notification No. 81/2023 Our Comments In the notified rules, the CBDT has retained the changes that were proposed earlier vide the press release as well as the draft rules. These amendments are certainly expected to provide the requisite flexibility in valuing the businesses based on their business models. Changes such as price matching, safe harbor, etc., are welcome measures and aim to factor in the various practical aspects and realms of realities impacting the valuation. While other measures could also have been looked at, for instance, aligning the valuation requirements under the Act with those prescribed by the Insolvency and Bankruptcy Board of India (IBBI), recognizing the professionals as authorized/registered under the IBBI norms, etc., overall, these changes are steps in the right direction. Nexdigm  ThinkNext@nexdigm.com | www.nexdigm.com USA | Canada | Poland | UAE | India | Hong Kong | Japan DISCLAIMER This alert contains general information which is provided on an "as is" basis without warranties of any kind, express or implied and is not intended to address any particular situation. The information contained herein may not be comprehensive and should not be construed as specific advice or opinion. This alert should not be substituted for any professional advice or service, and it should not be acted or relied upon or used as a basis for any decision or action that may affect you or your business. It is also expressly clarified that this alert is not intended to be a form of solicitation or invitation or advertisement to create any adviser-client relationship. Whilst every effort has been made to ensure the accuracy of the information contained in this alert, the same cannot be guaranteed. We accept no liability or responsibility to any person for any loss or damage incurred by relying on the information contained in this alert. © 2023 Nexdigm. All rights reserved.