Govt Introduces New Final Valuation Rules for Angel Tax on Foreign Investments

The finance ministry has introduced new final valuation rules that allow foreign investors to select a valuation method to gauge the worth of unlisted shares. This will allow them to avoid being entangled in the angel tax net by knowing if the valuation includes a premium.

According to the Income Tax Act, entities without substantial public interest are liable to pay tax under “income from other sources” when they receive a share premium. This may affect startups” capital-raising capacities, as startups commonly seek capital by diluting their stake in the company, and the valuation of the shares is calculated based on future valuation.

The new set of rules provides flexibility in the valuation methods by giving weightage to the future prospects of the company. The government has amended the income-tax rules on angel tax to offer more flexibility to investors. The new rules specify how the fair value of shares will be determined, and anything above the fair value by more than 10% will be taxed. The new rules also introduce a new mechanism for arriving at the fair market value of CCPS for investment from both residents and non-resident residents.

Experts have welcomed the new rules, saying that they will make it easier for investors to invest in startups.