Recently, the CBDT amended the valuation rules applicable with respect to issue of shares, which is also commonly referred to as Angel tax. 

Section 56(2)(viib) of the Income Tax Act read with Rule 11UA of the Income Tax Rules provides that where a closely held company issues shares to a resident investor at a value higher than the face value of such shares, then the excess of the issue price over the FMV will be taxed as income under the head “Income from other Sources.”

The Central Board of Direct Taxes (CBDT) vide Press Release dated May 19th, 2023 had proposed to bring in certain changes in Rule 11UA of the Income Tax Rules, 1962 read with Section 56(2)(viib) of the Income Tax Act, commonly known as “Angel Tax”. In regard to the same, a list of excluded entities from the applicability of Section 56(2)(viib) was notified vide Notification No. 29/ 2023 dated 24th May, 2023 and a set of draft rules was issued for public comments via Draft Notification dated 26th May, 2023.

Post public consultation, the CBDT vide Notification No - 81/ 2023 dated September 25, 2023, has now notified the final amended Rule 11UA for valuation of shares, including Compulsorily Convertible Preference Shares (CCPS). The said notification is in line with the Draft Rule 11UA issued via Notification dated May 26, 2023, except with respect to CCPS for which separate valuation mechanism has been provided in the final amended Rule 11UA.

Highlights of the final amended Rule 11UA, are as under –

• Separate valuation mechanism for CCPS has been provided for along with an option to adopt fair market value (FMV) of unquoted equity shares for determining FMV of CCPS. 

• For determining the FMV of equity shares issued to resident and non -resident investors, two methods namely – Net Asset Value and Discounted Cash Flow Method, were already prevalent. However, now, for non -resident investors, five more methods - viz. Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method and Replacement Cost Methods, have been introduced for valuation of issue of unquoted equity shares or CCPS. 

• Price matching facility as per draft rules for both resident and non-resident investors is now extended to CCPS as well.  Also, price at which shares are issued to notified non-resident entities / venture capital funds / specified funds shall be adopted as FMV, if receipt of consideration is within a window of 90 days before or after the date of issuance of shares subjected to valuation. 

• Valuation report of merchant banker can now be issued up to 90 days prior to the date of issue of equity shares or CCPS for computing FMV for investments by both resident and non-resident investors. 

• Safe harbor limit of 10% for valuation of equity shares and CCPS for both resident and non-resident investments, has been introduced.

In the attached newsflash, we have summarised and provided an overview of the final amended Rule 11UA. Hope you would find the same useful.