Income Tax Notification

CBDT’s Changes to Rule 11UA for ANGEL TAX

The Central Board of Direct Taxes (CBDT), under the Ministry of Finance, Government of India, recently issued a press release on September 26, 2023, announcing significant changes to Rule 11UA with respect to the “ANGEL TAX.” These changes come in response to amendments introduced by the Finance Act of 2023. The amendments primarily concern the taxation of consideration received from non-residents for the issuance of shares by unlisted companies under Section 56(2) (viib) of the Income-tax Act, 1961.

Here’s a detailed explanation of the key highlights and implications of the CBDT’s notification:

Background:

1. The Finance Act, 2023, expanded the scope of Section 56(2) (viib) of the Income-tax Act, which deals with the taxation of consideration received for the issuance of shares.
2. Under this provision, if the consideration for issuing shares exceeds the Fair Market Value (FMV) of the shares, it becomes taxable as “Income from other sources.”

Stakeholder Involvement:

• The Indian Government has been committed to involving stakeholders in the drafting of tax laws.
• Prior to these changes, suggestions and feedback were sought from stakeholders and the general public regarding the valuation methods for determining FMV. This feedback was collected through a press release on May 19, 2023.

Key Changes in Rule 11UA:

• Valuation Methods:
  • Two valuation methods, Discounted Cash Flow (DCF) and Net Asset Value (NAV), were available for residents under Rule 11UA.
  • The notification introduces five additional valuation methods for non-resident investors: Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method.

• Price of Equity Shares for Non-Resident Investors:
  • If an unlisted company receives consideration for issuing shares from a non-resident entity notified by the Central Government, the FMV of the equity shares can be determined based on the consideration received.
  • However, this is subject to the condition that the consideration from the FMV does not exceed the total consideration received from the notified entity.
  • The consideration should be received by the company from the notified entity within ninety days before or after the date of issuance of the shares.

• Parity for Resident and Non-Resident Investors:
  • The new rule ensures that resident and non-resident investors have similar pricing mechanisms for equity shares in cases involving investment by Venture Capital Funds or Specified Funds.

• Valuation Methods for Compulsorily Convertible Preference Shares (CCPS):
  • The notification provides guidance on the valuation of Compulsorily Convertible Preference Shares, offering clarity on this aspect of share valuation.

•  Safe Harbour Provision:
  • A safe harbour provision is introduced, allowing for a 10% variation in the value determined by the various valuation methods.

Rationale and Implications:

• These changes aim to expand the range of globally accepted valuation methodologies, thereby providing a level playing field for both resident and non-resident investors.
• The intent is to ensure fairness and transparency in the taxation of consideration received for issuing shares by unlisted companies, particularly when non-resident entities are involved.
• The safe harbour provision introduces an element of flexibility in valuation, acknowledging that variations may exist in the methods employed.

Access to the Notification:

• The full text of Notification No. 81/2023, dated September 25, 2023, containing the revised Rule 11UA, is available on the official website of the Income Tax Department at www.incometaxindia.gov.in.

In summary, the CBDT’s notification regarding changes to Rule 11UA reflects the Indian government’s commitment to creating a more equitable and transparent tax framework for both resident and non-resident investors in unlisted companies. The introduction of additional valuation methods and the safe harbour provision are significant steps towards achieving these objectives.

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