Context:
Finance Ministry has notified final rules outlining valuation methods for non-resident and resident investors under the new angel tax mechanism in the Finance Act 2023.
Details of News Summary
What are the new amended rules?
- Introduced an additional sub-clause addressing Compulsorily Convertible Preference Shares (CCPS).
What are CCPS?
- CCPS are a type of financial instrument issued by companies to raise funds from investors. These shares have a mandatory conversion feature, which requires the conversion of the shares into equity within a predetermined period.
What are 5 new valuation methods to be retained?
- Comparable Company Multiple Method
- Probability Weighted Expected Return Method
- Option Pricing Method
- Milestone Analysis Method
- Replacement Cost Method
Discounted Cash Flow (DCF) and Net Asset Value (NAV) are the methods available for valuation of shares.
What are the changes to the provision of angel tax?
| Earlier provisions | Amended provisions |
| In 2019 the Government announced an exemption from the Angel Tax for start-ups on fulfilment of certain conditions. | The government has proposed to include foreign investors in the ambit of angel investors to start-ups. |
| This levy is applicable only to domestic investments. | When a start-up raises funding from a foreign investor that too will now be counted as income and be taxable |
What is Angel Tax?
- It is a levy of 30.6% (in India at present) on the unlisted companies that have raised capital through sale of shares at a value above their fair market price.
- This excess capital is treated as income from other sources and is taxed.
- Fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset that is determined by the tax authorities.
- It was introduced in 2012 to prevent laundering of illegal wealth, by investing in shares of unlisted start-ups at extraordinary valuations.
Who is an angel investor?
- An angel investor is usually a high-net-worth individual who funds start-ups at the early stages, often with their own money.
What are the rules in Angel Tax?
- Any company less than 10 years old with turnover less than ₹100 crores are eligible for angel tax exemption.
- Investments up to ₹25 crores are exempt from angel tax.
- Investments made by listed company with a net worth of more than ₹100 crores or a turnover of more than ₹250 crores.
- For being eligible for exemption, a start-up should not be investing in immovable property, transport vehicles above ₹10 Lakhs, loans and advances & capital contribution to other entities, except in the ordinary course of its business.
- Start-up must be registered with the Department for Promotion of Industry and Internal Trade.
Example Scenario of Angel Tax:
- Suppose your start-up has managed to receive an investment of ₹50 crores by issuing 1 lakh shares to an Indian investor at ₹5000 each.
- The start-up’s fair market value is ₹2000 per share. Henceforth, the fair market valuation of shares stands at ₹20 crores.
- Then the start-up needs to pay angel tax on the excess of fair market value, which is ₹30 Crore (₹50 crores – ₹20 crores).
- As a result, the amount of tax due on this transaction will be ₹9.18 Crores (i.e., 30.6% on ₹30 Crores).
A listed company is a stock exchange-listed company wherein the shares are openly tradable. An unlisted company is a company that is not listed on the stock market.
Source: The Hindu
Previous Year Question
With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.
Select the correct answer using the code given below:
[UPSC Civil Services Exam – 2018 Prelims]
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (d)
