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

Suggestions/comments have been invited from stakeholders and general public on the draft rules, which can be sent to ustpl2@nic.in latest by June 5, 2023, the CBDT said in a tweet. The rules would be effective from April 1, 2023.

Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen LLP said though no changes are proposed for the prescribed net asset value and discounted cash flow (DCF)-based valuation methodology under Income-tax rules, all newly proposed five valuation methodologies for arriving at fair market value (FMV) of unquoted shares to be issued to non-resident investors, needs to be determined by Category I Merchant Banker registered with SEBI, who were earlier authorised to issue valuation report under DCF method as well.

“Allowance for price variation within 10 percent from price arrived using prescribed valuation methodology, in case of share issuance to residents and non-residents, has been proposed. A validity period of 90-days prior to the date of issue of shares, as reported in the earlier press release, also finds a mention in the notification seeking public comments,” he said.

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

The CBDT has already notified investments from 21 countries, including the US, UK and France as exempt entities from angel tax. Countries like Singapore, Netherlands and Mauritius, which constitute the major chunk of foreign direct investment in India, have not been included in the exemption list. Though the move is being viewed as a measure to plug loopholes for investments from tax havens, it is also expected to hit fundraising by startups.

Other excluded entities include investors registered with Sebi as Category-I FPI, Endowment Funds, Pension Funds and broad-based pooled investment vehicles where the number of investors in such vehicle or fund is more than fifty along with government and government-related investors such as central banks, sovereign wealth funds, international or multilateral organisations or agencies including entities controlled by the government or where direct or indirect ownership of the government is 75 per cent or more; and banks or entities involved in insurance business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident.

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