Industry players and tax consultants expect that the new angel tax rules and valuation mechanism for Compulsorily Convertible Preference Shares (CCPS) will provide the much need relief to start-ups.

The Central Board of Direct Taxes (CBDT) has notified amendments in Rule 11UA of Income Tax Rules, 1962, retaining the draft made public in May. Also, it separately introduced a mechanism for arriving at the fair market value of CCPS for investments from residents as well as non-resident.

Mayank Singh, Co-founder of Campus 365, said the finance ministry’s role in introducing and amending angel tax policies has influenced investor confidence, ease of doing business and the growth of start-ups in India. Impact of new valuation methods has enhanced precision, risk assessment and tailored valuations, improving financial analysis and investment decisions.

“The introduction of these valuation methods has significantly impacted financial analysis and investment decision-making. These methods have improved precision, allowed for better risk assessment and made valuations more tailored to specific industries and asset classes, ultimately contributing to more informed investment strategies and decisions,” he said.

‘Much-needed relief’

According to Gaurav VK Singhvi, Co-Founder of We Founder Circle, these policy changes are significant as it provides much-needed relief by reducing the tax burden for both start-ups and investors. Moreover, “it streamlines the taxation process, fostering a more favorable environment for investment and innovation,” he said.

Tax consultants feel that new notification will bring a lot a clarity in tax mechanism. Amit Agarwal, Partner, Nangia and Co LLP, said the amendments bring positive changes by offering taxpayers multiple valuation methods, simplifying the valuation date consideration, incentivising venture capital investments, facilitating investments from notified entities, providing clarity on compulsorily convertible preference shares, and encouraging foreign investments.

“The inclusion of a tolerance threshold for minor valuation discrepancies further enhances efficiency and fairness in tax assessments, ultimately benefiting both taxpayers and the government,” he said.

Subramaniam Krishnan, Partner, Private Equity Tax, EY India said that the introduction of five alternative valuation methods for the valuation of equity shares, which hitherto could only be valued based on NAV and discounted free cash flow methods, should provide more flexibility to merchant bankers for the valuation of a company.

“The extension of the valuation methods, the 10 per cent safe harbor, comparable transaction-based pricing, etc, to compulsorily convertible preference shares provides the desired flexibility given that a substantial number of transactions in Indian companies are structured in the form of investments in such convertible instruments,” he said.

According to Atul Puri, Managing Partner and with SW India, the amended rule will bring in more clarity for both investor and investee about which valuation method can be adopted, thereby, reducing the chances of any future litigation and addressing illegitimate or non-genuine transactions while promoting investments in eligible start-ups.

Anil Talreja, Partner, Deloitte India, hopes that the investors will now get a push to consummate their investment in Indian companies. “One issue that needs to be seen is whether these announcements can be regarded as clarificatory in nature and hence retrospective in interpretation or whether these would be applicable from immediate effect as per the plain reading of the notification,” he said.

comment COMMENT NOW