Amid startups’ funding winter, Centre seeks to soften angel tax

The government has eased some of the provisions of the Angel Tax introduced in this year’s Budget on investments into startups by non-resident investors at a premium over their fair market value, introducing five different valuation methods for shares and offering a 10% tolerance for deviations from the accepted share valuations. 

The government has eased some of the provisions of the angel tax introduced in this year’s Budget on investments into startups by non-resident investors at a premium over their fair market value. It has introduced five different valuation methods for shares and offered a 10% tolerance for deviations from the accepted share valuations.

As per a notification issued by the Central Board of Direct Taxes on Monday, Rule 11UA under the Income Tax Act has been amended, with some changes to the draft norms released in May, bringing some relief to prospective foreign investors in startups.

“The introduction of five alternative valuation methods for the valuation of equity shares, which so far could only be valued based on NAV and Discounted Free Cash Flow methods, should provide more flexibility to merchant bankers for the valuation of a company,” said Subramaniam Krishnan, partner, private equity tax at EY India. The option to value equity shares by any of these five methods is not available to resident investors.

Deloitte India partner Anil Talreja said Indian companies and investors were facing severe practical difficulties in executing a simple transaction involving infusion of capital on account of lack of clarity on these rules. “Hopefully the investors will now get a push to consummate their investment in Indian firms,” he said.

“The amended rule brings in more clarity for both investor and investee basis which an appropriate valuation method can be adopted, thereby, reducing the chances of any future litigation and addressing illegitimate or non-genuine transactions while promoting investments in eligible startups,” explained Atul Puri, managing partner and co-founder of SW India.

“One issue that needs to be seen is whether these announcements can be regarded as clarificatory in nature and hence retrospective in interpretation or whether these would be applicable from immediate effect as per the plain reading of the notification,” Mr. Talreja noted.