CBDT Proposes Changes To Rule 11UA In Respect Of Angel Tax, Notifies Excluded Entities

The Central Board of Direct Taxes (CBDT) has proposed the changes to Rule 11UA in respect of Angel Tax and has also notified the excluded entities.

In the Finance Act, 2023, an amendment has been introduced to bring the consideration received from non-residents for the issue of shares within the ambit of Section 56(2)(viib) of the Income-tax Act, 1961. It provides that if such consideration for the issue of shares exceeds the fair market value (FMV) of the shares, it shall be chargeable to income tax under the heading ‘Income from other sources’.

Subsequent to the amendment, detailed interactions have been held with stakeholders. Based on the inputs, Rule 11UA for the valuation of shares for the purposes of Section 56(2)(viib) is proposed to be modified. The notification of entities to which the provision shall not apply is also being issued separately.

Rule 11UA currently prescribes two valuation methods with respect to the valuation of shares, namely, the discounted cash flow (DCF) and net asset value (NAV) methods for resident investors. It is proposed to include five more valuation methods, available for non-resident investors, in addition to the DCF and NAV methods of valuation.

Where any consideration is received by a company for the issue of shares from any non-resident entity notified by the Central Government, the price of the equity shares corresponding to the consideration may be taken as the FMV of the equity shares for resident and non-resident investors, subject to two conditions.

Firstly, to the extent that the consideration from such FMV does not exceed the aggregate consideration that is received from the notified entity.

Secondly, the consideration has been received by the company from the notified entity within a period of ninety days of the date of issue of the shares, which are the subject matter of valuation.

It was also proposed to notify certain classes of persons who are non-resident investors to whom clause (viib) of sub-section (2) of Section 56 shall not be applicable.

Section 56(2)(viib) includes 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% or more. Banks or entities involved in insurance business where such an entity is subject to applicable regulations in the country where it is established, incorporated, or is a resident Any of the entities that are residents of certain countries or specified territories have a robust regulatory framework.

Date: 19/05/2023

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