cvThe Finance Act of 2023 brought an essential amendment to the story of angel tax to bring in the consideration received from the non-resident under the purview of angel taxes. Such an amendment in the Indian tax law would impact how multinationals would function, mainly the subsidiaries and JV entities in India. The start-up ecosystem would also feel the impact of looking to raise funding from sources outside India. While the founders and management would love to maximise the per-share value during a fundraising stage, the tax law would put necessary checks in the way to ensure that the funding stays at a fair market value.
Now, the board has notified the Income-tax (Twenty-First Amendment) Rules, 2023, amending Rule 11UA [valuations rule of valuing unlisted securities during the issue]. The final notification aligns with the provisions outlined in the initial draft rule. However, the board has also introduced additional guidelines for calculating the fair market value of compulsorily convertible preference shares (CCPS).
The changes notified in Rule 11UA are mentioned below:
(a) FMV of compulsorily convertible preference shares shall be determined in accordance with the method prescribed by the amended rules.
(b) Five new methods have been introduced for calculating the FMV of unquoted shares, as determined by the merchant banker. These methods are exclusively applicable for determining the FMV of shares issued to non-resident investors.
- (i) Comparable Company Multiple Method [transfer pricing search principles could be used]
- (ii) Probability Weighted Expected Return Method
- (iii) Option Pricing Method
- (iv) Milestone Analysis Method and
- (v) Replacement Cost Methods
(c) If a company receives consideration for issuing shares from a notified entity*, the equity share price for other investors may be considered FMV. However, the company must receive consideration from the notified entity within 90 days before or after issuing the shares in question.
(d) Venture capital undertakings can use the equity share price issued to a venture capital fund, venture capital company, or specified fund as a reference.
(e) Merchant Banker Report to be valid for 90 days from the issue date.
(f) A tolerance level of 10% is considered justifiable and would be treated at fair market value.
Given the above, companies should consider tax as a strategic function, especially when raising funds and ensure that the actions are not converted into tax risks.
* for the meaning of notified entity refer.https://incometaxindia.gov.in/communications/notification/notification-29-2023.pdf