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. |
