CBDT Proposes Amendments to Angel Tax Rule

Section 56(2)(viib) of the Income Tax Act read with Rule 11UA of the Income Tax Rules provides that where a closely held company issues shares to a resident investor at a value higher than the face value of such shares, then the excess of the issue price over the FMV will be taxed as income under the head “Income from other Sources.”

Recently, the Central Board of Direct Taxes (CBDT) vide Press Release dated May 19th, 2023 has proposed to bring in certain changes in Rule 11UA of the Income Tax Rules, 1962 read with Section 56(2)(viib) of the Income Tax Act, commonly known as “Angel Tax”. In regards to the same, a list of excluded entities from the applicability of Section 56(2)(viib) was notified vide Notification No. 29/ 2023 dated 24th May, 2023 and a set of draft rules was issued for public comments via Draft Notification dated 26th May, 2023.

The Draft Rules proposes to introduce 5 more valuation methods in addition to DCF and NAV for computing the FMV of unquoted shares issued to non-resident investors. Further, a price matching facility is set to be introduced in accordance with which where a company receives consideration for share issuance from a notified entity, the price of the equity shares corresponding to that consideration can be considered as the FMV for other investors. Such benchmarking is applicable only in specific instances and also subject to the company receiving the consideration within 90 days of the share issuance.

In the attached newsflash, we have summarised the proposed changes brought in to Rule 11UA. Hope you would find the same useful.