The Finance Ministry on Friday proposed changes in the Budget proposal of angel taxation and also notified foreign entities which will be exempted from the tax provisions.

The draft proposal prescribes five methods for non-resident investors, apart from discounted cash flow (DCF) and net asset value (NAV) method for resident investors, with respect to valuation of shares. It has been said that where any consideration is received by a company for issue of shares, from any non-resident entity notified by the Central government, 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.

On similar lines, price matching for resident and non-resident investors would be available with reference to investment by venture capital funds or specified funds.

It is proposed that the valuation report by the merchant banker for the purpose of this rule would be acceptable, if it is of a date not more than 90 days prior to the date of issue of shares, which are subject matter of valuation.

Further, to account for forex fluctuations, bidding processes and variations in other economic indicators, etc. which may affect the valuation of the unquoted equity shares during multiple rounds of investment, it is proposed to provide a safe harbor of 10 % variation in value.

“The draft Rules on the above lines will be shared for public comments for 10 days, after which these will be notified,” Central Board of Direct Taxes said. It may be noted that an amendment through Finance Act 2023 intends to bring the consideration received from non-residents for issue ofshares within the ambit of section 56(2)(viib) of the Income-tax Act, 1961, which provides that if suchconsideration for issue of shares exceeds the FMV of the shares, it shall be chargeable to income-tax under the head ‘Income from other sources’.

Exempted entities

In a notification, the Ministry said that 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 per cent or more will be exmpted from provision of new angel taxation.

Beside these banks, insurance companies, SEBI registered Category-I Foreign Portfolio Investor, Endowment Funds associated with a university, hospitals or charities, Pension Funds and Broad Based Pooled Investment Vehicle or Fund with 50 or more investors will also be in exempted category.