The Union Ministry of Finance on May 19 announced proposed changes to the tax regulations pertaining to angel investors.
- The phrase ‘angel tax’ is used to describe the tax that must be paid on the funds raised by unlisted companies through the issuance of shares in off-market transactions, if they exceed the fair market value of the company.
key points
- The Central Board of Direct Taxes (CBDT) proposed amendments to Rule 11UA regarding the valuation of shares for the purpose of section 56(2)(viib) of the Income-tax Act, 1961.
- Currently, Rule 11UA prescribes two valuation methods, namely Discounted Cash Flow (DCF) and Net Asset Value (NAV), for resident investors.
- The government intends to include five additional valuation methods specifically for non-resident investors, in addition to the existing DCF and NAV methods.
- The proposed legislation aims to strengthen India’s startup ecosystem by providing more liberty to both resident and non-resident investors, resulting in increased global investment in the domestic market.
- In the past, the angel tax was only applicable to resident investors. However, Budget 2023–24 introduced provisions to extend the angel tax to non-resident investors as of April 1, 2024.
- The Finance Act, 2023, has amended Section 56(2) (viib) of the I-T Act, thereby bringing overseas investment in unlisted held companies under the tax net.
- Thus, the provisions of Section 56(2)(viib) of the Act has been widened to cover within it’s ambit receipt of consideration from any person irrespective of their residential status. The objective was to widen the tax base by rationalizing the tax provisions and to eliminate tax avoidance by non-residents.
