Vide Notification No. 81/2023 dated September 25, 2023, the Central Board of Direct Taxes (CBDT) has notified amendment to Rule 11UA of the Income-tax Rule, 1962 (Notified Rule) for the purpose of Section 56(2) (viib) of the Income-tax Act, 1961 (the Act).
- Section 56(2) (viib) of the Act provides that in case an unlisted company receives any consideration for the issue of unquoted equity shares from any resident or non-resident exceeding the fair market value (FMV) of the shares, then such excess amount is taxable in the hands of such unlisted company (commonly known as Angel Tax).
- Earlier, the said provisions were applicable in case of shares issued to residents only. Finance Act 2023 extended the scope of applicability for shares issued to non-residents.
- In May 2023, CBDT vide Notification no. 29/2023 notified class of persons to whom Section 56(2)(viib) does not apply and further issued draft rules for public consultation.
- Key amendments:
- Notified Rule recognise 5 new valuation methodologies to include globally accepted methodology for nonresidents.
- Such Rule also provides for mechanism for calculating FMV of compulsorily convertible preference shares (CCPS).
- Safe harbour for unquoted equity shares and CCPS is available in cases where issue price does not exceed 10% of the FMV determined as per the Rules. Such Safe harbour is not applicable in cases where valuation corresponding to 'Eligible Transactions' (i.e., issue of shares 'by VC Undertaking' OR 'to Notified entity') has been adopted.
- Notified Rule is applicable for transactions undertaken after September 25, 2023 (i.e., the date of notification).
Summary - Valuation Rules for determining value of unquoted equity share
Methodologies | Applicability to investor | Erstwhile Rule | As per Notification 81/2023 |
Adjusted Net Asset Value Method (A–L) × [PV/PE] | Resident and Nonresident |
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Discounted Cash Flow Method | Resident and Nonresident |
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Comparable Company Multiple Method | Non-resident only - | - |
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Probability Weighted Expected Return Method | |||
Option Pricing Method | |||
Milestone Analysis Method | |||
Price Matching option | |||
Shares issued by VC Undertaking within 90 days before or after issue of shares to VC Fund, VC company or Specified Fund. | Resident and Non-resident | - |
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Shares issued by a company within 90 days before or after issue of shares to a notified entities as per Notification 29/2023 | Resident and Non-resident | - |
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Summary - Valuation Rules for determining value of CCPS
Particulars | Valuation Methodology |
Resident |
Option to determine FMV of CCPS as per:
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Non-resident |
Option to determine FMV of CCPS as per:
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ELP Comments |
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