The Central Board of Direct Tax (CBDT) has notified new valuation methods by amending provisions of Rule 11UA of Income Tax rules with effect from 23rd September, 2023. This amendment is made post covering fundings received from non-resident in excess of Fair market value under income tax ambit.
This article contains a detailed analysis of amendment made in Section 56 of Income Tax Act read with Rule 11UA of Income Tax rules:
1. Earlier Law
- As per Section 56(2)(viib) of Income Tax Act , if any closely held company receives consideration from any resident person for issuance of shares, including preference shares, then consideration received in excess of Fair Market Value (FMV) of such shares shall be considered as “Income from Other Sources”.
- However, such a section shall not apply if consideration is received from any non-resident.
- Provisions of Section 56(2)(viib) is also known as “Angel Tax” provisions.
- Fair Market Value of such shares is to be determined as per the provisions of Rule 11UA of Income Tax Rules.
- As per Rule 11UA, FMV of unquoted equity shares can be determined as per any of the following methods, as per option of assessee:
- Net Asset value of the company as per Books of accounts; or
- Value as per Discounted Cash Flow (DCF) method; or
- FMV of preference shares shall be the estimated price it would fetch if sold in the open market on the valuation date. Assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.
2. Amendment
- Finance Act,2023, has proposed to delete the word “Resident” from Section 56(2)(viib) with effect from 01.04.2023.
- As a consequence, consideration received from Non-residents for sale of equity shares or preference shares in excess of Fair Market Value shall be subject to income tax under head other sources.
- The expansion of angel tax provisions gave rise to concerns regarding valuation disputes on investments made by genuine and regulated NR investors in Indian companies (including start-ups registered with the Department for Promotion of Industry and Internal Trade -DPIIT).
- In response to queries from industries, CBDT amended Rule 11UA with effect from 25th September, 2023.
3. Amendment in Valuation Rules
- Amended rules provide for valuation of Unquoted Equity Shares and Compulsorily Convertible Preference Shares (CCPS).
- Following are the amended valuation rules:
3.1 Unquoted Equity Shares:
3.1.1 Unquoted Equity Shares are issued to Residents:
In case unquoted equity shares issued to residents, valuation can be done through either of the following method at the option of the assessee:
- Net Asset Value method: Under this method, FMV of equity shares is derived through (A-L)*(PV/PE) where:
- A: Book Value of Assets in the Balance Sheet
- L: Books value of the Liabilities excluding shareholder’s fund and other specified amount
- PV: Paid up value of Equity shares issued
- PE: total amount of paid up equity share capital as shown in the balance-sheet
- Discounted Free Cash Flow method as determined by a merchant banker
3.1.2 Unquoted Equity Shares issued to Non-residents:
In case of shares issued to non-resident, Fair market value can be determined through any of the following method at the option of the assessee:
- Net Asset Value Method
- Discounted Free Cash Flow method
- Comparable Company Multiple Method
- Probability Weighted Expected Return Method
- Option Pricing Method
- Milestone Analysis method
- Replacement Cost Method
3.2 Compulsorily Convertible Preference Shares (CCPS)
In case of Issuance of Compulsorily Conertible preference Shares (CCPS), Rule 11UA provides different methods of valuation based on status of person to whom shares are issued. Rule 11UA(2)(B) specifies method of determination of FMV of CCPS.
3.2.1 CCPS issued to residents
向居民发行的可转换累积优先股（CCPS）的公允市场价值（FMP），应由纳税人选择以下任一方法确定：
- 由商业银行确定的现金流折现法；
- 基于上述方法确定的非上市权益股公允市场价值。
3.2.2 向非居民发行的 CCPS
向非居民发行的 CCPS 的公允市场价值（FMP），应由纳税人选择以下任一方法确定：
- 由商业银行确定的现金流折现法；
- 基于上述方法确定的非上市权益股公允市场价值
- 可比公司乘数法
- 概率加权预期收益法
- 期权定价法
- 里程碑分析法
- 重置成本法
3.3 CCPS 以外的优先股
CCPS 以外的优先股的公允市场价值（FMP）应为估值日若在公开市场上出售所能获得的估计价格。纳税人可就此类估值获取商业银行或会计师出具的报告。
3.4 针对居民和非居民投资的价格匹配机制
根据第 56(viib) 条的第一项但书，在以下情况下，第 (viib) 款的规定不适用于发行股票所收取的对价：
- 风险投资企业从风险投资公司、风险投资基金或特定基金处收取的对价；或
- 公司从中央政府通知的特定类别主体处收取的对价。
根据第 11UA 条规则，若风险投资企业从风险投资基金、风险投资公司或特定基金处收取对价，或公司通过发行非上市权益股从通知的特定类别主体处收取对价，则与该对价相对应的权益股价格可视为公允市场价值。
但是，由此类公允市场价值收取的对价不得超过从通知主体、风险投资公司或风险投资基金处收取的对价总额。
此外，公司须在作为估值对象的股票发行日前后 90 天内收到此类对价。
例如：某公司从通知主体处获得 500,000 卢比的资金，用于发行 500 股股票。因此，该公司可在收到通知主体对价的前后 90 天内，以每股 1000 卢比的价格向任何其他投资者发行 500 股股票。
此公允市场价值（FMV）计算选项适用于居民和非居民，涵盖非上市权益股和 CCPS 的发行。
3.5 延长商业银行估值的时间期限
- 原第 11UA 条规则要求提供股票发行当日的商业银行估值报告。
- 然而，修订后的第 11UA 条规则提供了灵活性，允许商业银行在权益股和 CCPS 发行日前 90 天内提供报告。
- 因此，估值日期的参考标准已从收到对价之日修改为商业银行估值报告出具之日。
3.6 10% 的安全港估值容差限额
- 此前，超过公允市场价值收取的对价被视为“其他收入”，需缴纳所得税且无任何豁免。
- 然而，修订后的第 11UA 条规则提供了 10% 的安全港。
- 因此，对于向居民发行的股票，若收取的对价（发行价）在以下数值的 110% 以内：
- 按净资产价值法或现金流折现法确定的权益股公允市场价值；
- 按现金流折现法确定的 CCPS 公允市场价值
那么，发行价应被视为股票的公允市场价值，并据此执行。
公司无需缴纳任何所得税。
- 若向非居民发行股票，且发行价格在以下价格的 110% 以内：
- 普通股公允市场价值（FMV）按净资产价值（NAV）、现金流折现法（DCF）或新增的 5 种指定方法中的任一方法确定；
- 可转换优先股（CCPS）公允市场价值按现金流折现法（DCF）或新增的 5 种指定方法中的任一方法确定
则发行价格将被视为股票的公允市场价值，据此，
公司无需缴纳任何所得税。
