SUMMARY
On Friday (May 26), the CBDT issued a notification inviting comments on the draft 11UA of Income-tax Rules, 1962
The CBDT is yet to come out with guidelines for valuing foreign investments in startups not recognised by the DPIIT
The Finance Act, 2023 has added that such investments over and above the FMV will be taxed regardless of the domicile of the investor
The income tax department is seeking stakeholders comments on the draft investment valuation rules for angel tax.
The draft rule is to check the investments made by non-residents and foreign nationals in Indian startups. Henceforth, the draft rules will be used to decide the so-called angel tax.
The development comes as part of the ongoing debate on the angel tax, which the startup industry has been opposing citing the risk of exacerbating the ongoing funding winter.
On Friday (May 26), the Central Board of Direct Taxes (CBDT) issued a notification inviting comments on the draft 11UA of Income-tax Rules, 1962.
“As a result of the above amendment, representations were received from various stakeholders raising their concerns that genuine non-resident investors may have to face undue hardship in matters related to valuation of shares etc. In view of this, rule II UA of the Rules is proposed to be amended,” the CBDT said in its notification, referring to the amendments proposed to the Finance Act, 2023.
Specifically, the notification was about the method of computation of fair market value (FMV) of unquoted equity shares for the purposes of section 56(2)(VIIb) of Income Tax Act, 1961.
The rules would be effective from April 1, 2023.
However, the CBDT is yet to come out with guidelines for valuing foreign investments in startups not recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) to levy income tax.
Under the existing angel tax norms, only the investments made by domestic investors in unlisted companies are taxed over and above the fair market value (FMV), and not the valuation.
The Finance Act, 2023 has added that such investments over and above the FMV will be taxed regardless of the domicile of the investor.
As there are two separate laws governing the fair market value calculations of a startup investment, the industry has raised concerns after the amendments proposed in the latest finance bill.
To be sure, the CBDT has already notified 21 countries and sovereignties, including the US, the UK and Japan, from where foreign investment in Indian startups will not attract angel tax.
However, another bone of contention emerged as the likes of Singapore, Mauritius, the Cayman Islands and the Netherlands were omitted from the angel tax exemption list.
This year’s Union Budget saw the government bring unlisted Indian startups, except DPIIT-recognised startups, under the angel tax net. The move prompted startups and venture capitalists to seek exemptions for certain overseas investor classes.
Earlier this month, the CBDT notified the classes of investors exempted from the angel tax. These include those registered with SEBI as Category-I FPI, endowment funds, pension funds and broad-based pooled investment vehicles.
However, these exempted investor classes have to have their domicile in the 21 exempted countries to be eligible for an angel tax exemption.
The VCs, however, are still planning to approach the I-T department over the exclusion of countries such as Mauritius and Singapore, given the high number of VC funds which are set up in these territories.
