The Income Tax Department has introduced new rules for valuing equity shares and compulsorily convertible preference shares (CCPS) issued by startups to both resident and non-resident investors. These rules, which come into effect from September 25, offer more flexibility to taxpayers through multiple valuation methods. They simplify the valuation date consideration and incentivize venture capital investments. Additionally, the rules aim to attract foreign investments and provide clarity on CCPS.
Among the notable changes is the inclusion of a tolerance threshold for minor valuation discrepancies, enhancing efficiency and fairness in tax assessments. The new rules retain five valuation methods for consideration from non-residents, such as the Comparable Company Multiple Method and Option Pricing Method. Moreover, they extend a 10% safe harbor provision to CCPS investments, providing a margin of safety to account for foreign exchange fluctuations.
These amendments seek to align rules on angel tax with those outlined in the Foreign Exchange Management Act (FEMA) and the Income Tax Act. Previously, only investments by domestic investors or residents in closely held or unlisted companies were subject to taxation above the fair market value. The Finance Act of 2023 mandated that such investments beyond the FMV would be taxed, regardless of the investor’s residence status. These new rules bridge the gap between FEMA and the Income Tax Act and aim to streamline the valuation process for startups.
Amit Agarwal, Partner at Nangia & Co LLP, praised the amendments, highlighting the benefits of offering taxpayers a broader range of valuation methods, fostering clarity, and encouraging foreign investments. Amit Maheshwari, Tax Partner at AKM Global, noted the significance of extending the 10% safe harbor to CCPS investments, providing protection against foreign exchange fluctuations.
The revised rules aim to promote startup investments, simplify valuation, and provide clarity, ultimately benefiting both taxpayers and the government.
