The IT department invites you to comment on the draft rules for evaluating non-resident investments in startups

The Income Tax Department on Friday invited stakeholders to comment on the rules for evaluating non-resident investments in unquoted startups. Central Board of Direct Taxes (CBDT) issued a draft notice inviting comments on draft rule 11UA of the Income Tax Rules of 1962 relating to the method of calculating the fair market value (FMV) of unquoted shares of common stock for the purposes of section 56(2)(viib) of the Income Tax Act of 1961.

The rules will come into force on April 1, 2023. The CBDT was expected to issue guidance on evaluating non-resident investments in unrecognized start-ups for income tax purposes.

Under existing regulations, only investments by local investors or residents in private companies were taxed above fair market value. This was usually called angel tax.

The Finance Act 2023 states that such investments in excess of FMV will be taxable regardless of whether the investor is a resident or non-resident.

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Following the proposed amendments to the Finance Law, concerns have arisen about the methodology for calculating fair market value under two different laws.

CBDT has already notified 21 countries, including the US, UK and France, of which non-resident investments in unlisted Indian startups will not be subject to angel tax.

However, the list does not include investments from countries such as Singapore, the Netherlands and Mauritius.

The government has included in the budget foreign investment in closed companies that are not listed on the exchange, with the exception of start-ups recognized by DPIIT, under the angel tax network.

Since then, the startup and venture capital industry has demanded an exemption for certain categories of foreign investors.

On May 24, the CBDT notified classes of investors that are not subject to the business angel tax provision.

Excluded entities include those registered with Sebi as a Category I FPI, Endowment Funds, Pension Funds and Broad-Based Investment Funds that are residents of 21 designated countries, including the US, UK, Australia, Germany and Spain, according to the notice. .

Other countries mentioned in the notice are Austria, Canada, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand and Sweden.

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