Angel Tax.

The amendment in the angel tax provisions vide Finance Act 2023 bringing foreign investments within its ambit, left a bitter taste with both, foreign investors focused on writing cheques to invest into India's lucrative markets and Indian businesses looking at overseas investors as their biggest carrots to fund their transformative and evolutionary ideas. Although the Government tried to play its cards right by introducing this amendment to curb circulation of unaccounted money, this change ended up throwing the baby out with the bathwater, by adversely affecting genuine investments.

The amendment was seen as an antithesis to India's ardour of being an investor-friendly jurisdiction, and several representations were made by the investor community to the Government due to the glaring incongruence between the valuation mechanism on the issue of shares as per FEMA rules and the Income Tax Rules. Where on one hand FEMA accepts any internationally accepted pricing methodology and sets the minimum or floor price for issue, on the other hand, the Income tax Rules cap the share price to the FMV (computed as per Discounted Cash Flow method or the Net Asset value method), and any price above the capped price is taxed.

However, stakeholders were clutching the straws to ensure that spirits are not dampened and investments continue with minimal setbacks. In the midst of this uppity climate, the press release can be seen as an attempt to assuage frayed nerves of stakeholders by acknowledging the problem statement and seeking to bring respite by proposing to amend the valuation rules and notifying certain excluded entities.

Briefly, the following has been indicated:

1.     Five more valuation methods for non-resident investors will be prescribed in addition to DCF and NAV methods of valuation.

2.     Where consideration is received by a company for issue of shares from any non-resident entity notified by the Central Govt., the price of the equity shares corresponding to such consideration may be taken as FMV of equity shares for resident and non-resident investors subject to the specified conditions. 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.

3.     The date of the valuation report obtained from Merchant Banker should not be more than ninety days prior to the date of issue of shares.

4.     Safe harbor of 10% for forex fluctuations, bidding processes and variations in other economic indicators, etc. will be acceptable.

5.     Investment from specified entities (Category-I Foreign Portfolio Investors, Pension funds, broad based pooled investment vehicle / fund where the number of investors are more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies, etc.

 

The draft rules will be put out for public comments before being notified.

Will be interesting to watch out for the draft rules, including the new valuation methodologies. Deeming value at which funds are raised from certain prescribed non-residents as the FMV is an interesting proposition as it also aligns with the FEMA provisions which permit raising funds from non-residents at a value higher than the certified FMV as per internationally acceptable valuation methodologies.