CBDT notifies changes to Rule 11UA in respect of ANGEL TAX

The Finance Act of 2023 included an amendment that brought the consideration received from non-residents for the issue of shares by an unlisted company within the ambit of section 56(2)(viib) of the Income-tax Act of 1961 (the Act), which states that if such consideration for the issue of shares exceeds the Fair Market Value (FMV) of the shares, it is chargeable to income-tax under the head ‘Income from other sources’.

In keeping with the Government’s commitment to involving stakeholders in the drafting of the law, suggestions and feedback on the Draught Rule 11UA for valuation of methods for calculating the Fair Market Price were solicited from stakeholders and the general public.

Taking into account the suggestions received and detailed interactions with stakeholders, Rule 11UA for the valuation of shares for the purposes of Section 56(2)(viib) of the Act has been modified by notification no. 81/2023 dated September 25th, 2023.

The key highlights of the changes in Rule 11 UA are:

In addition to the two methods for valuing shares available to residents under Rule 11UA, namely, Discounted Cash Flow (DCF) and Net Asset Value (NAV), five more valuation methods have been made available to non-resident investors, namely, Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method.

Where any consideration is received for issue of shares from any non-resident entity notified by the Central Govt., the price of the equity shares corresponding to such consideration may be taken as the FMV of the equity shares for resident and non-resident investors, subject to the following:

(i) To the extent the consideration from such FMV does not exceed the aggregate consideration that is received from the notified entity, and

(ii) The consideration has been received by the company from the notified entity within a period of ninety days before or after the date of issue of shares which are the subject matter of valuation.

Similarly, price matching for resident and non-resident investors would be available in the case of Venture Capital Funds or Specified Funds investments.

There are also valuation methods for calculating the FMV of Compulsorily Convertible Preference Shares (CCPS).

A safe harbor of 10% variation in value has been provided.

The notified Rule calls for the valuation methodologies to be expanded to include globally accepted methodologies and to provide broad parity to resident and non-resident investors.