India: Proposed change to valuation rules under “Angel Tax”

The Central Board of Direct Taxes announced that it proposes to change valuation rules under “Angel Tax”

Proposed change to valuation rules under “Angel Tax”

The Central Board of Direct Taxes (CBDT) announced in a press release that it proposes to change the valuation rules under the “Angel Tax.”  


When a private company receives any consideration for the issue of shares from any resident exceeding the fair market value of the shares, then such excess amount is taxable under Section 56(2)(viib) of the Income-tax Act, 1961 (the so-called “Angel Tax”). The Finance Act 2023, introduced an amendment in Section 56(2)(viib) to apply such provisions to the issuance of shares to any nonresident.

Subsequently, on the basis of the inputs of various stakeholders, the valuation rules (Rule 11UA) under Section 56(2)(viib) are proposed to be modified. 

Proposed changes to Rule 11UA

  • Rule 11UA currently prescribes two valuation methods with respect to the valuation of shares i.e., discounted cash flow (DCF) and net asset value (NAV) method for resident investors. It is proposed to include five more valuation methods available for nonresident investors in addition to the DCF and NAV.
  • Further, when any consideration is received by a company for the issue of shares, from any nonresident entity notified by the Central government, the price of the equity shares corresponding to such consideration may be taken as the fair market value of the equity shares for resident and nonresident investors.
  • The valuation report by a merchant banker would be acceptable evidence of value if it is dated not more than 90 days prior to the date of issuance of the shares.
  • Further, to account for forex fluctuations, bidding processes, and variations in other economic indicators that may affect the valuation of the unquoted equity shares during multiple rounds of investment, a safe harbor of 10% variation in value is proposed.

Excluded entities

  • The CBDT is also expected to propose exclusions from the Angel Tax for certain nonresident investors and start-ups.

KPMG observation

The proposed changes to the valuation rules, especially increasing the valuation methods to include five more options, will provide flexibility to investors. Further, the provision to account for forex fluctuations, bidding processes, and economic indicators will also help investors to manage the unpredictability in the value of unquoted equity shares.

Read a May 2023 report [PDF 335 KB] prepared by the KPMG member firm in India


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