Angel Tax: How to determine the value of unlisted equity shares and convertible preference shares?
On the 25th September 2023, the Central Board of Direct Taxes (CBDT) released Notification No. 81/2023, which brings amendments to Rule 11UA. This rule outlines the procedures for evaluating investments made by both resident and non-resident investors in closely held companies (e.g., start-ups). This valuation process plays a crucial role in deciding whether Angel Tax will be applicable to these start-ups. Prior to this release, the board had issued a preliminary draft of the rule and sought feedback and comments from stakeholders and the general public.
Angel tax is levied on unlisted companies that receive share application funds or premiums from their investors that exceed the fair market value of the unquoted equity shares. It was initially introduced in the Finance Act 2012 under clause (viib) of Section 56(2), targeting share application funds and premiums from resident investors. The Finance Act 2023 expanded the scope of the provision to include share application money/premium received from a person, irrespective of his residential status. With this change, excess share application money or premium received from non-resident investors may also be subject to angel tax.
The provisions of Section 56(2)(viib) apply if all of the following conditions are satisfied:
If all these conditions are satisfied, the consideration received in excess of Fair Market Value (FMV) of shares is considered as an income of the company issuing the shares.
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The guidelines for calculating FMV of shares are outlined in Rule 11UA of the Income-tax Rules, 1962. The erstwhile Rule provided only two approaches for determining FMV: the Discounted Cash Flow
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