By Amigos IAS

Why is it in the news?

  • Recently, the Indian government has eased some of the provisions of the angel tax introduced in this year’s Budget.
  • The changes pertain to investments into startups by non-resident investors at a premium over their fair market value.

More about the news

  • The Central Board of Direct Taxes has amended Rule 11UA under the Income Tax Act, bringing some relief to prospective foreign investors in startups.
  • The amendments introduce five different valuation methods for shares and offer a 10% tolerance for deviations from accepted share valuations.
  • Previously, equity shares could only be valued based on Net Asset Value (NAV) and Discounted Free Cash Flow methods.
  • These changes provide more flexibility to merchant bankers for the valuation of startup companies.
  • The option to value equity shares using any of the five methods is not available to resident investors.
Angel Tax

·       The provision known as the ‘angel tax’ was initially introduced in 2012 to discourage the generation and utilization of unaccounted money through investments in closely held companies.

·       It is 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.

·       Fair market value (FMV) is the price of an asset when buyer and seller have reasonable knowledge of it and are willing to trade without pressure.

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