Amendments in “Angel Tax”

1.Announcement by Government

CBDT proposed amendments to Rule 11UA regarding the valuation of shares for the purpose of section 56(2)(viib) of the Income-tax Act, 1961. These changes aim to address concerns surrounding the applicability of Tax Collection at Source (TCS) on shares issued to nonresidents.

2. Intent

Currently, Rule 11UA prescribes two valuation methods, namely Discounted Cash Flow (DCF) and Net Asset Value (NAV), for resident investors. The government intends to include five additional valuation methods specifically for non-resident investors, in addition to the existing DCF and NAV methods.

3.Background

Section 56(2)(viib)(popularly known as Angel Tax) was inserted via Finance Act, 2012. The objective of introducing the section was to deter the generation and use of unaccounted money done through subscription of shares of a closely held company(CHC), at a value which is higher than the Fair Market Value (FMV) of shares of such company.
The phrase ‘angel tax’ is essentially used to describe the tax that must be paid on the funds raised by unlisted companies through the issuance of shares in off-market transactions, if they exceed the fair market value of the company.

4.Cautions & Impact

This means that if the consideration for shares exceeds their fair market value (FMV), it becomes taxable under “Income from other sources.”

The valuation report prepared by a Merchant Banker will be considered acceptable if it is not older than ninety days from the date of issuing the shares being evaluated. This ensures the relevance and accuracy of the valuation.
Also, a safe harbor of 10 percent variation in value is introduced. This will accommodate potential fluctuations, bidding processes, and variations in economic indicators

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