angel tax rules: Changes proposed to Angel Tax rules, more valuation flexibility on the cards

India on Friday proposed to exclude a host of foreign investors including sovereign wealth funds and pensions funds from the purview of the so-called “angel tax“, offering the much-needed relief to the startup sector staring at a funding winter.

Those entities that face this tax will also have more valuation flexibility while computing this it, according to the draft rules put out by the Central Board of Direct Taxes (CBDT), the apex direct taxes body.

Investments by non-resident investors including central banks, multilateral entities, foreign pension and endowment funds, banks and insurers, foreign portfolio investors and entities registered with market regulator Securities and Exchange Board of India will not attract the angel tax.

Merchant banker valuation
Broad Based Pooled Investment Vehicle or Fund where the number of investors in such vehicle or fund is more than 50, barring hedge funds, have also been excluded from the tax’s purview.

Overseas investments into startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) will not attract this tax, the statement said.

Investments by foreign entities that have not been excluded will face the angel tax. The CBDT has proposed to accept valuation by a merchant banker undertaken within 90 days of issue of shares by a startup.ET in its May 3 edition had reported on the proposed move.

Wider valuation norms

The draft regime allows five more valuation methods besides the discounted cash flow and net asset value methods permitted as of now.

The final rules will be notified after taking into account public comments.

Further, to account for forex fluctuations, bidding processes and variations in other economic indicators, which may affect the valuation of the unquoted equity shares during multiple rounds of investment, it is proposed to provide a safe harbour of 10% variation from the determined value.

Tax experts said the suggestions from the stakeholders have been taken into consideration for the proposed changes.

“Care has been taken to exempt institutional investors of all kinds thus leaving only individual investors and companies to comply with the prescribed valuation norms,” said Sudhir Kapadia, partner, tax and regulatory services, EY. “Perhaps the variance from prescribed valuation could have been kept at 25% instead of 10%.”

“The government seems to have listened to the hues and cries of the investor community, and as a welcome move, has proposed to introduce five new valuation rules to bridge the gap,” said Sandeep Jhunjhunwala, M&A tax partner, Nangia Andersen LLP. “Merchant banker valuation, however, seems mandatory now for all valuation methods, though with an extended validity of 90 days prior to share issue date, which was earlier aligned to the date of issue of shares itself and was a requisite only for DCF valuation.”

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