Angel Tax implications for a new company intending to raise capital by issuing shares – Explained
Question: We are a recently established Private company intending to raise capital by way of issuing shares to both residents as well as non-residents. In this respect, kindly guide us on the tax implications of the Angel Tax and the recent amendments made pertaining to the same.
Dr Suresh Surana, Founder, RSM India, answers:
Section 56(2)(viib) of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’) provides that where a closely held company issues shares to an investor at a value which is higher than the face value of such shares, then the excess of such issue price over the Fair Market Value would be subjected to tax as “Income from other Sources” in the hands of the company issuing such shares. Taxing such excess consideration is generally known as “Angel Tax”. However, the said provision would not be applicable in case of issuance of shares by eligible startups as well as in certain cases where the issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund.
For the aforesaid purpose, FMV of the equity shares is determined in accordance with the methods prescribed under Rule 11UA of the IT Rules i.e. either through the book value method (‘NAV’) or the discounted cash flow (‘DCF’) method, at the option of the company. Recently, CBDT has made the following changes to Rule 11UA:
In addition to the 2 methods for valuation of shares, namely, DCF and NAV method, available to residents under Rule 11UA, 5 more valuation methods have been made available for non-resident investors:
Comparable Company Multiple Method
Probability Weighted Expected Return Method
Option Pricing Method
Milestone Analysis Method
Replacement Cost Method.
A
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