CBDT Proposes Changes in Angel Tax Rules In a much-needed relief to the startup sector, the Central Board of Direct Taxes (CBDT) on Friday proposed changes to the angel tax rules and notified foreign entities which will be exempted from the tax provisions.

In a much-needed relief to the startup sector, the Central Board of Direct Taxes (CBDT) on Friday proposed changes to the angel tax rules and notified foreign entities which will be exempted from the tax provisions. These entities include government and government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled by the government or where direct or indirect ownership of the government is 75% or more.

Besides these, banks or entities involved in insurance business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident also find mention in the list of proposed exempted entities.

Changes in valuation norms

For valuing shares, the CBDT has proposed five more valuation methods for non-resident investors which is limited to just two valuation methods in Rule 11UA under the Income Tax - Discounted Cash Flow (DCF) and Net Asset Value (NAV).

It also stated that where any consideration is received by a company for issue of shares from any non-resident entity notified by the Central Govt , the price of the equity shares corresponding to such consideration may be taken as the Fair Market Value (FMV) of the equity shares for resident and non-resident investors provided consideration from it does not exceed the aggregate consideration that is received from the notified entity, and that consideration has been received by the company from the notified entity within a period of 90 days of the date of issue of shares.

Further it also proposed to accept valuation by a merchant banker undertaken within 90 days of issue of shares by a startup.

The above proposed rules is available for public comments for 10 days, after which they will be notified.

The proposed changes were welcome by the investors across the board. Says Karthik Reddy, Managing Partner, Blume Ventures & Chairperson, IVCA, "The notification from CBDT and MF has been well received by the PE/VC industry as it provides more clarity to Indian startups and investors in relation to section 56(2)(viib). The proposed norms aim to expand valuation methodologies and eliminate price differentials between resident and non-resident investors. We thank the Finance Ministry for actively addressing the industry's concerns and acknowledging a broader range of institutional investors in the exempted list. This inclusive approach will facilitate ongoing investments in the country."

Shauraya Bhutani, Co-founder, Capital Connect Advisors also welcomed the changes and said, "The funding winter has hit Indian start-ups hard and stifled innovation with lesser startups being launched and quite a few shutting shop, so any move which may encourage investments is a welcome relief for the overall ecosystem. The recently proposed changes will help mitigate the tax expense for investors, which in turn will help with their expected returns projections, with an expansion in valuation methodologies, allowing startups to move away from rigid and traditional methodologies to ones which are closer to real valuations and specific to their business models."

"The proposed changes also aim to bring in parity between resident and non-resident investors, which hopefully will re-open foreign capital gates in a time where startups need more capital options apart from domestic based funds. The Indian startup ecosystem heavily relies on foreign capital when it comes to larger amounts and later rounds – this is bound to help some of the Series B+ startups going out to raise capital," he added.