CBDT notifies the final Rule 11UA relating to amended angel tax provisions and introduces a valuation mechanism for Compulsorily Convertible Preference Shares

On May 19, 2023 the CBDT had issued a draft notification proposing amendment in Rule 11UA. CBDT has further issued certain amendments in Rule 11UA vide this notification. In this notification CBDT has introduced the mechanism for determining the FMV of Compulsorily Convertible Preference Shares (CCPS) with respect to investments made by residents as well as non-residents, prescribed five additional  methods for the valuation of unquoted equity shares and CCPS to be determined by a merchant banker.

Name of the Circular/Update : CBDT notifies the final Rule 11UA relating to amended angel tax provisions and introduces a valuation mechanism for Compulsorily Convertible Preference Shares

Date : September 25, 2023

Circular / Update Number : Notification No. 81 /2023 [F. No. 370142/9/2023]

Link for the Circular /Update : https://incometaxindia.gov.in/communications/notification/notification-43-2023.pdf

 Brief of Notification :

The rules shall come into force from the date of publication of the notification in the Official Gazette.

In light of representations made by various stakeholders raising their concerns that non- resident investors may face undue hardship in matters related to the valuation of shares, the Central Board of Direct Taxes (CBDT) had issued a draft notification, on 19^th May 2023, proposing an amendment in Rule 11UA(click on the link for draft notification). Further vide this notification CBDT has now notified the amendments in Rule 11UA.

The other key changes in final notification are hereunder:

1. For the purposes of section 56(2) – sub-clause (i) of clause (a) of the Explanation to clause (viib)- the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares, as shall be determined under sub-clause (a) to (e), at the option of the assessee, where the consideration received by the assessee is from a resident/non-resident, in the following manner:

The fair market value of unquoted equity shares =(A–L)× [PV/PE], where,

A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:—

(i)  the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;

(iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(v)  any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

 PE = total amount of paid up equity share capital as shown in the balance-sheet;

 PV = the paid up value of such equity shares; or

2. The fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method;
3. The fair market value of the unquoted equity shares determined by a merchant banker in accordance with any of the following methods:

• • Comparable Company Multiple Method;
  • Probability Weighted Expected Return Method;
  • Option Pricing Method;
  • Milestone Analysis Method;
  • Replacement Cost Methods;

4. Price Matching benefit – Where any consideration is received by a Venture Capital Undertaking (VCU) for the issue of unquoted equity shares to a Venture Capital Fund (VCF) or a Venture Capital Company (VCC) or a specified fund, the price of the equity shares corresponding to such consideration may, at the option of VCU, be taken as the FMV of the equity shares for other resident and non-resident investors, subject to below conditions:

• • the consideration from such other resident and / or non-resident investor does not exceed the aggregate consideration that is received from a VCF or a VCC or a specified fund; and
  • the consideration has been received by the undertaking from the VCF or a VCC or a specified fund within a period of 90 days before or after the date of issue of shares which are the subject matter of valuation.

5. Similar price matching benefit would be available if the issuer Company has received any consideration for the issue of unquoted equity shares from any entity notified under clause (ii) of the first proviso to Section 56(2)(viib) (the issuance of shares to whom are exempted from Angel Tax provisions), within a period of 90 days before or after the date of issue of shares which are the subject matter of valuation.
6. Valuation mechanism for CCPS:

• • FMV to be determined by a merchant banker as per the discounted free cash flow method or based on the FMV of unquoted equity shares determined as per prescribed valuation methods in case of investment by residents as well as non-residents.
  • Price matching benefit as provided above shall be applicable even in case of investment in CCPS by resident as well as non-residents.

7. Safe harbor introduced:

• • For timing of valuation: Where the date of valuation report by the merchant banker is not more than ninety days prior to the date of issue of unquoted equity shares which are the subject matter of valuation, such date may, at the option of the assessee, be deemed to be the valuation date. The definition of valuation date under Rule 11U(j) shall not be applicable.
  • For the amount of fair valuation: The issue price shall be deemed as the FMV of such unquoted equity shares or CCPS if the variation between the issue price and price determined with the methods provided under this rule is not more than 10% (excluding cases where price matching benefit has been obtained).