Relaxations for start-ups from “Angel Tax”

[Vivek Jalan]

Extension of “Angel Tax” was a set-back of sorts for start Ups. Section 56(2) (vii b) required that where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares. Now this provision is applicable to NRIs also. The logic behind application of angel tax had earlier been cited as to prevent generation and circulation of unaccounted money through share premium received from investors in a closely held company in excess of its fair market value. How this logic applies to NRI funding had not been explained. It was expected that the NRI funding to new companies and start-ups also might now come under scrutiny, just like resident funding, as it was very difficult to convince field officers about the valuation of startups. This would impact the growth of startups, which went against the Government’s broad focus. One logic given for the introduction of this amendment was that it prevented start-ups to over value their shares as was seen in case of recent IPOs. However, the question which was to be asked was that in such case, how can Unicorns be created, a policy which The Government prides itself with. Now the CBDT has issued a paper for modification of the policy so as to not to apply for start-ups registered with DPIIT. This comes as a relief of sorts. Further other reliefs are also proposed on aspects of angel tax. While some are applicable exclusively to investment by NRIs, some are applicable to investment by both residents and NRs. The existing Rule 11UA prescribes two methods (viz. NAV or DCF) for determining FMV of shares issued to investors. CBDT proposes to include five more valuation methods for NRI investors. Price matching facility will be available for both resident and NRI investment. 90- day window period will be available for merchant banker valuation. Important is the aspect of Safe harbour valuation tolerance limit of 10%. Existing angel tax provision and Rule 11UA does not provide for any safe harbour valuation tolerance limit. As per the press release, a tolerance limit of 10% shall be introduced to factor in variations due to forex fluctuations, bidding processes and other economic indicators, etc. which may affect the valuation of the unquoted equity shares during multiple rounds of investment. While it is not expressly mentioned, it appears to apply to investment by both residents and NRIs.