Jul 28, 2023

Angel Tax Development – Expansion of Scope and Exemptions

The erstwhile Section 56(2)(viib) of the Income-tax Act, 1961 (‘IT Act’) provided that where a company, in which public are not substantially interested, received any consideration for issue of shares from a “resident” in excess of their face value, the difference between the consideration so received and the fair market value of such shares (computed either as per the book net asset value method or the discounted cash flow method) was taxable in the hands of the issuer company as “income from other sources.” The Finance Act, 2023 amended Section 56(2)(viib) of the IT Act to extend the applicability of this provision to consideration received for issue of shares from “non-residents” as well with effect from April 1, 2023, i.e. FY 2023-24 and onwards.

Further to the aforesaid amendment by which the scope of the angel tax provisions was expanded, the Government has issued two notifications dated May 24, 2023, namely, Notification No. 29/2023 and Notification No. 30/2023 in providing certain exemptions from applicability of angel tax. Notification No. 29/2023 provides that Section 56(2)(viib) will not be applicable in cases where consideration is received by a company from Government and Government related investors, certain banks or entities involved in insurance business and SEBI registered Category-I FPIs, certain endowment funds, pension funds and broad based pooled investment vehicle or fund where the number of investors in such vehicle or fund is more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies (incorporated in 21 specified countries such as Australia, Austria, Canada, Denmark, France, Germany, Japan, UK, USA etc.).

Further, Notification No. 30/2023 exempts specified start-ups receiving consideration for issue of shares at a premium from the applicability of Section 56(2)(viib).

In addition to the above, the Government has also released certain draft amendments to Rule 11UA (which provides the valuation methodologies for the purposes of determining the fair market value of shares under Section 56(2)(viib) of the IT Act) for public comments. The draft amendments have inter alia expanded the scope of this rule by incorporating additional methods for valuation of shares for the purposes of Section 56(2)(viib).




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