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Section 50CA, A New Conundrum For Angel Investors

Section 50CA, A New Conundrum For Angel Investors

As Per The New Norms, Investors Need To Disclose Their Unquoted Shares As Well

While angel tax getting barred up to $1.5 Mn (INR10 Cr) funding giving some relief to startups as well as angel investors, Section 50CA of Finance Act 2017 is the new cauchemar for angel investors.

Effective from April 1, 2018, as per  Section 50CA applicable for FY18 ITR forms, investors now need to disclose deal valuations and report the accurate capital gains over the same.

So far, income chargeable under capital gains were computed by taking into account the amount of full value of the consideration received or accrued on the transfer of a capital asset which also contained provisions for deeming of stamp duty value as a full value of the consideration for the transfer of immovable property in certain cases.

As per the IT department, there was a room to misreport unquoted shares as to be understood as understated value.

The IT department in a press statement had averred,

  • The Finance Act, 2017 inserted clause (x) in sub-section (2) of Section 56 of the Income tax Act,1961(‘the Act’) so as to widen the scope of taxability of receipt of the sum of money or property without/inadequate consideration.
  • Under the said clause read with Rule 11UA of the Income-tax Rules, 1962(‘ the Rules’) if a person receives jewellery or artistic work or shares and securities for no / inadequate consideration, the fair market value(FMV) of the same is taken into account for computing taxable income under the said clause.
  • Similarly, for immovable property, the stamp duty value is taken into consideration for determining taxability under the same section. However when these assets are received as underlying assets of unquoted equity shares of company, the book value (and not the FMV / stamp duty value) is taken into consideration for determining the value of such shares.
  • Finance Act, 2017 inserted new section 50CA in the Act w.e.f 1st April, 2018 to provide that where consideration for transfer of unquoted equity share of a company is less than the FMV of such share determined in accordance with the prescribed manner, the FMV shall be deemed to be the full value of consideration for the purposes of computing income under the head “Capital gains”.

Computing FMV

Fair Market Value (FMV) definition has been tweaked making investors now to disclose unlisted shares as well as the full value of the consideration received or receivable in respect of the unquoted shares sold by them during the year.

The FMV will now be calculated as:

FMV = (A+B+C+D-L) x (PV)/(PE)

Where:

FMV: Fair Market Value

  • A: Book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance sheet as reduced by (i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any, and (ii) any amount shown as asset including the unamortised amount of deferred expenditure that does not represent the value of any asset;
  • B: The price that the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer;
  • C: FMV of shares and securities as determined according to this rule;
  • D: The value adopted or assessed or accessible by any authority of the government for the purpose of payment of stamp duty in respect of the immovable property;
  • L= Book value of liabilities shown in the balance sheet, but not including the following amounts, namely:
    • (i) the paid-up capital in respect of equity shares;
    • (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general meeting of the company;
    • (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
    • (iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
    • (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
    • (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;
  • PE: Total amount of paid up equity share capital as shown in the balance-sheet; and
  • PV: Paid up value of such equity shares

Before finalising the Act, the IT department had asked the stakeholders to submit their responses over the draft; however, the Act – after it was enacted by the parliament – didn’t have any remarkable change.

Some relief in terms of the minimum quoted amount was being expected by the small/angel investors; however, the draft has been enacted as it which means all big or small investors will have to spend more to meet the new ITR compliance, while calculating the FMV.

Author

Suprita Anupam

Inc42 Staff

An Electronics Engineer turned Business Journalist | Blogger | Avid Reader. Previously associated with Network18, Mudra Communications and Clean India Journal, he has been writing on a variety of issues that include cryptocurrency, policy-related matters, blockchain, investments-destination, technology and other startup related matters.

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https://inc42.com/buzz/taking-lessons-from-the-competitors-bhim-will-now-offer-cashbacks-to-merchants/
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