I-T department invites comments on draft rules for valuing startup investment by non-residents

The income tax department on Friday invited comments from stakeholders on rules for valuing non-resident investment in unlisted startups. The Central Board of Direct Taxes (CBDT) has issued a draft notification inviting comments on the draft rule 11UA of Income-tax Rules, 1962, pertaining to the method of computation of fair market value (FMV) of unquoted equity shares for the purposes of section 56(2)(viib) of Income-tax Act, 1961.

The rules would be effective from April 1, 2023. The CBDT was expected to come out with valuation guidelines for valuing non-resident investment in unrecognised startups for the purpose of levying income tax.

Under the existing norms, only investments by domestic investors or residents in closely held companies were taxed over and above the fair market value. This was commonly referred to as an angel tax.

The Finance Act, 2023, has said that such investments over and above the FMV will be taxed irrespective of whether the investor is a resident or non-resident.

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Post the amendments proposed in the Finance Bill, concerns have been raised over the methodology of calculation of fair market value under two different laws.

The CBDT has already notified 21 countries, including the US, UK and France, from where non-resident investment in unlisted Indian startups will not attract angel tax.

The list, however, excludes investment from countries like Singapore, Netherlands and Mauritius.

The government had in the Budget brought overseas investment in unlisted closely held companies, except DPIIT recognised startups, under the Angel Tax net.

Following that, the startup and venture capital industry sought exemption for certain overseas investor classes.

The CBDT on May 24 notified classes of investors who would not come under the Angel Tax provision.

Excluded entities include those registered with Sebi as Category-I FPI, Endowment Funds, Pension Funds and broad-based pooled investment vehicles, which are residents of 21 specified nations, including the US, UK, Australia, Germany and Spain, as per the notification.

The other nations mentioned in the notification are Austria, Canada, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand and Sweden.

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