Decoding India’s Angel Tax Reforms

The Government of India has made amendments to the Angel Tax provision of India which will have a huge impact on the country, There are several changes regarding valuation rules, segments of investors the tax will be levied on, the methods, validity, and so on, In this article we will delve into the most important and impactful changes in the Angel Tax laws of India and subsequently attempt to analyze the consequences of such regulatory changes on the startup ecosystem’s growth and overall health.

Shares can be issued based on the valuation report of the merchant banker within 90 days

Under the new government rules, shares can now be issued based on valuation reports of merchant bankers issued up to 90 days prior to the issue of shares. This resolves the long-standing question of the validity time period of such reports.

In other words, the valuation report issued by a merchant banker would be acceptable evidence of the value of shares of a company if it has been issued up to 90 days prior to the date of issuance of the shares. This change provides more flexibility to startups and investors, as they can rely on the valuation report created by a reliable merchant banker to determine the fair market value of unquoted equity shares without any apprehension of financial irregularities.

If shares are issued at a price not exceeding 10% of the valuation price, the same can be taken as the fair market value of shares

If a company issues shares at a price that does not exceed 10% of the valuation price, the same can be considered to be the Fair Market Value (FMV) of the shares. This practice provides a tolerance limit for assessing the issue price of the shares and offers startups and investors some flexibility. Additionally, it also makes sure startups as well as investors are not penalized by the law for small amounts of deviations in the issue price of the shares.

In case of the issue of shares to non-residents, merchant bankers can follow any of the 5 given methods of valuation

Earlier angel tax was levied only on resident investors. However, the angel tax’s purview has now been expanded and will also be levied on non-resident investors.

In the case of the issue of shares to non-residents, the appointed merchant banker can follow any of the five given methods of valuation. This provides more options for non-resident investors and ensures that the valuation of shares is done in a fair and transparent manner, which ultimately helps reinforce trust in the system. The five given methods of valuation are — (i) Comparable Company Multiple Method, (ii) Probability Weighted Expected Return Method, (iii) Option Pricing Method, (iv) Milestone Analysis Method, and (v) Replacement Cost Method.

By giving flexibility in the valuation method, the government is trying to also protect the future prospects of the company, especially with regard to tax.

In case of the issue of shares to a venture capital fund shares can be issued to any other investor at the same price within a period of 90 days

In the case of the issue of shares to venture capital funds, shares can be issued to any other investor at the same price within a period of 90 days. This ensures that the valuation of shares is done in a fair and transparent manner and provides more flexibility to startups and investors. This change ensures that the valuation of shares is not affected by the identity of the investor.

In case of the issue of compulsorily convertible preference shares, any of the given methods can be followed for valuation

In the case of the issue of Compulsorily Convertible Preference Shares (CCPS), any of the given methods can be followed for valuation. The methods include the Discounted Cash Flow Method, the Net Asset Value Method, the Price-Earnings Ratio Method, the Price-Sales Ratio Method, and the Transaction Value Method. According to the new regulations, the valuation of CCPS can also be done on the basis of the Free Market Value (FMV) of unquoted equity shares. This provides more flexibility to startups and investors and ensures that the valuation of shares is done in a fair and transparent manner. While this does provide some flexibility, it also adds a layer of complexity that investors and founders have to navigate through.

Impact on Startups and Investors

The changes made to the valuation rules under the angel tax provisions have several implications for startups and investors. The changes offer more clarity and flexibility in determining the fair market value of unquoted equity shares for taxation purposes. The changes offer options for both residents and non-residents and introduce a tolerance limit for assessing the issue price. The changes are aimed at addressing concerns about valuation disputes and ensuring clarity in the taxation of investments, both from residents and non-residents. These changes are expected to encourage more investment in Indian startups and promote entrepreneurship in the country.

The recent updates in the rules for valuation and its validity period are essential steps in properly regulating the startup ecosystem in India and are important to boost the ecosystem. The changes will go a long way in providing not just flexibility to stakeholders but also clarity and a fair perspective of things to come in the future. They offer clarity in determining the Fair Market Value (FMV) of unquoted equity shares for the purpose of taxation. This will greatly reduce the disputes and disagreements arising from overvaluation and also provide clarity regarding taxation on both residents as well as non-resident investors.

There are some steps that may be perceived as detrimental to the volume of investments — such as the levying of angel tax on non-resident investors, however, we can expect further regulations that will ultimately boost the ecosystem since it would be in line with the policies of the Government of India. The effects will be visible over the coming years.