For newly established private companies looking to raise capital through share issuance, it’s essential to be aware of the tax implications of Angel Tax and recent amendments. Angel Tax, as per Section 56(2)(viib) of the Income Tax Act, applies when closely held companies issue shares at a value higher than their face value. The excess of the issue price over the Fair Market Value (FMV) is taxed as “Income from other Sources.”
Applicability Exceptions
Angel Tax provisions do not apply to eligible startups and certain cases where shares are issued to venture capital undertakings. FMV is determined under Rule 11UA of the IT Rules, using methods like Net Asset Value (NAV) or Discounted Cash Flow (DCF).
Recent Changes to Rule 11UA
The Central Board of Direct Taxes (CBDT) has introduced new valuation methods for non-resident investors in addition to DCF and NAV:
- Comparable Company Multiple Method
- Probability Weighted Expected Return Method
- Option Pricing Method
- Milestone Analysis Method
- Replacement Cost Method.
Safe Harbor Provision
A safe harbor of a 10% value variation is introduced. If the issue price doesn’t exceed the Rule 11UA value by more than 10%, it’s considered as FMV.
Consideration from Notified Entities
If a closely held company receives consideration for shares from a notified entity, that price can be considered FMV for both resident and non-resident investors. However, this applies if the consideration doesn’t exceed the aggregate consideration received from the notified entity, within 90 days before or after the share issuance.
Matching Prices for Resident and Non-Resident Investors
Similar price matching is available for resident and non-resident investors concerning investments by Venture Capital Funds or Specified Funds.
These rules are crucial for new companies seeking to raise capital through share issuance, ensuring compliance with Angel Tax regulations and recent amendments.