Mayank Singh, Co- founder of Campus 365 said “I welcome these proposed changes by the CBDT. Increasing the valuation methods to include five more options provides enhanced flexibility to both resident and non-resident investors, helping us to attract global investment and sustain growth. The provision to account for forex fluctuations, bidding processes, and economic indicators is a significant step towards managing the unpredictability in the value of unquoted equity shares. A safe harbor of 10% variation in value is a considerate move in these dynamic market conditions."
“The exclusions proposed for certain non-resident investors, including sovereign wealth funds and regulated entities, is a positive move that recognises the integrity of these organizations and should bring increased funding stability. This will also boost the start-up ecosystem and encourage entrepreneurial spirit. This truly shows that the government is actively working to ensure a more favorable and investor-friendly business environment. These amendments promise to provide a conducive environment for investment and growth, particularly for the SaaS industry which is primarily driven by innovation and constant evolution. We are excited about these changes and look forward to their positive impacts," Mayank Singh added.
Suman Bannerjee, CIO, Hedonova, a US based hedge fund said “The proposed regulations aim to bolster India's startup ecosystem. They exempt most foreign investors deserving of an 'angel tax' waiver. However, I propose a long-term holding period for these exempted entities. Non-compliance should result in taxation, which would inhibit speculative behavior in startup equity, prevent money laundering, and shield Indian entrepreneurs from the undue pressure of deep-pocketed, impatient foreign investors."
Vaibhav Gupta, Partner, Dhruva Advisors said “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."
“The notification from CBDT and MF has been well received by the PE/VC industry as it provides more clarity to Indian startups and investors in relation to section 56(2)(viib). The proposed norms aim to expand valuation methodologies and eliminate price differentials between resident and non-resident investors. We thank the Finance Ministry for actively addressing the industry's concerns and acknowledging a broader range of institutional investors in the exempted list. This inclusive approach will facilitate ongoing investments in the country," said Karthik Reddy, Managing Partner, Blume Ventures & Chairperson, IVCA.
How angel tax norms for startups will unlock world of possibilities for investors?
Dr. Somdutta Singh, Founder and CEO of a cross-border e-commerce accelerator Assiduus Global said “It's time for the government to empower businesses by allowing valuations based on any globally accepted methodology. Let's open the floodgates of innovation and embrace the diversity of valuation practices! Just like in the case of immovable property sales, the government should establish a buffer zone for issuing shares above the FEMA floor value. Doing so creates a fair and flexible environment that nurtures growth and investment. Let's create opportunities that push boundaries and ignite progress! Aligning the I-T Act with FEMA valuation guidelines under sub-rule 2 of 11UA will unlock a world of possibilities. By embracing internationally accepted valuation methodologies, we pave the way for a globally harmonized approach that stimulates economic growth and collaboration."
The amendment's impact resembles that of angel tax on startups. Currently, only SEBI-registered Category I and II funds are exempt, meaning funds from abroad will be affected. Valuation rules under FEMA and income tax differ, potentially leading to scrutiny if FEMA valuation exceeds Income Tax fair value.
The Finance Bill of 2023 has introduced a captivating proposal: the removal of residency conditions from a particular section. This means that even non-resident investors can now benefit from it. In line with India's foreign exchange pricing guidelines, there's a crucial floor in place - shares issued to non-resident investors must not fall below the Fair Market Value (FMV) of the shares. Enter the Angel tax, aiming to tax any amount received above the FMV as income for the company. This creates a tax-efficient conundrum for businesses: their best bet is to secure investments at the exact FMV, added Somdutta Singh.
Ashwani Singh, Managing Director & CIO, 35North Ventures India Discovery Fund said “The valuation methodology of a startup is key as it determines the taxation for a domestic or international investor. As every company has sector related multiples, the age of the company, for cash flow basis valuation, usually it is an amalgamation of various methodology to arrive at a more reasonable valuation of the company. Any changes have to reflect this reality as genuine investors need to be comfortable with valuations that have a strong validation."
How angel tax norms for startups may impact on flow of Foreign Direct Investments in India?
Nishit Parikh, Partner - Sudit K Parekh & Co. LLP said “The Union Budget 2023, expanded applicability of section 56(2)(viib) of the Income-tax Act, 1961 (the ‘Act’), commonly referred to as angel tax provisions, regarding issuance of shares by a closely held company to non-resident investors. Thus, the provisions of Section 56(2)(viib) of the Act has been widened to cover within it’s ambit receipt of consideration from any person irrespective of their residential status. The objective was to widen the tax base by rationalizing the tax provisions and to eliminate tax avoidance by non-residents. This amendment provided for taxation in the hands of issuer company on the excess value, if they raised investment at a value higher than the Fair Market Value as prescribed even where investment was from non-resident."
This led to lot of fears among start-ups as this may lead to additional costs in raising funds and also overall impact on flow of Foreign Direct Investments in India.
In order to rationalize the provisions, CBDT has issued a press release on May 19, 2023 to amend Rule 11UA. Proposed changes grant relief for investment received from Category 1 FPI, Government fund, sovereign funds, etc. by covering them under the ambit of excluded entities. Other major changes include:
1. Five more methods of Valuation over and above the existing valuation mechanism of NAV and DCF.
2. Protection to certain notified entities and allowing price matching of such value received from notified entities as well as from VCF, Specified Funds to be used as FMV for resident and non-resident investors.
3. Valuation from Merchant Banker being acceptable provided that the report shall not be older than 90 days.
4. Safe Harbor of 10% to provide for variation in value on account of forex fluctuations, bidding processes and variations in other economic indicators
5. Relaxation for Start-ups subject to satisfaction of prescribed conditions.
6. Notification of excluded entities regarding non-applicability of angel tax.
Overall, this is a welcome move. This will help the ever-growing start-up eco-system to raise funds from investors overseas without incurring additional tax outgo, added Nishit Parikh.
How angel tax exemption will be a game-changer for startups?
Babita Rani, Tax Consultant said “The introduction of angel tax exemption through recent tax laws in India is a significant step towards creating a favorable ecosystem for startups. The increase in the threshold, simplified compliance, and relief for angel investors provide a much-needed boost to the Indian startup ecosystem. These measures encourage entrepreneurship, attract investments, and promote innovation, ultimately contributing to economic growth and positioning India as a global hub for startups. The angel tax exemption is a game-changer for startups, unlocking their potential and creating a vibrant landscape for innovation and growth."
Recognizing the need to address this issue and promote a favorable environment for startups, the Indian government has taken steps to provide relief and exemption from angel tax. These changes were implemented through amendments to the Finance Act and the introduction of Notification No. GSR 127(E)
The threshold limit for startups eligible for angel tax exemption has been raised from INR 10 crore to INR 25 crore. This revision benefits a larger pool of startups, enabling them to attract higher investments without the worry of angel tax implications. The increased threshold allows more early-stage ventures to benefit from the exemption, facilitating their growth.
Earlier, there was tax exemption for two classes of VC funding for start-ups – the alternative investment funds (AIF) in India and the foreign investors.
Now, the exemption for foreign investors has been removed by the government. This has been upsetting for the start-ups as around 90 per cent of their funding comes from foreign investments. Many experts believe that this move could be damaging for the start-ups if exceptions are not made towards start-up funding.
The Finance Bill 2023 has proposed that the provisions of angel tax will be applicable to non-resident investment firms as well. This means that foreign investment in Indian start-ups will also be subject to this tax. This amendment has left start-ups worried as many of them are now raising funds from global investors, added Babita Rani.
Gopal Bohra, Partner, Direct Tax, N.A. Shah Associates said the proposed change in determination of Fair Market Value by introducing 5 more valuation method for issue of shares to non-resident investors and to provide a safe harbour variation between consideration for issue of shares to resident and non-resident investors with consideration received on issue of shares to Central Government notified non-resident entity or Venture Capital Fund or Specified Funds will be a stepping stone towards certainty from angel tax to companies or start-up issuing shares.
Further, currently angel tax is not applicable to eligible start-ups which are approved by DPIT and inter-ministerial board on receipt of consideration for issue of shares from resident investor, has now been extended on receipt of consideration from non-resident investor also. All these changes proposed by CBDT through press release are welcome steps and in right direction to provide tax clarity to issuer companies and will mitigate frivolous litigation, but will have to wait till the draft rules and 5 new valuation methods are unveiled by CBDT, added Gopal Bohra.
Sanjay Sehgal, Chairman & CEO at MSys Technologies , Venture & Angel Investor, Philanthropist said “Global economic downturn and funding-winter has led to a slowdown in the Indian startup ecosystem and these new changes to Angel tax comes as a timely relief from the government. It also creates an opportunity for non-resident angel investors like me to operate more efficiently where the company receives consideration for share issuance from a 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 for both resident and non-resident investors. Hence, creating a levelled playing field and promoting a more favorable investment environment for non-resident investors and start-ups in India."
CA Manish Mishra, Virtual CFO said “The Income Tax Department in India has proposed changes to address Angel Tax, aiming to exempt certain entities from its burden. Among the entities considered for exemption are SEBI-registered Foreign Portfolio Investors (FPIs), pension funds, and Sovereign Wealth Funds (SWFs). The objective is to alleviate these entities from the challenges associated with Angel Tax and foster increased investments in Indian startups. To implement these changes, the Central Board of Direct Taxes (CBDT) plans to make amendments to Rule 11UA, which focuses on the valuation of unquoted shares for calculating Angel Tax. Additionally, the CBDT intends to issue a notification specifying the categories of entities exempted from Angel Tax regulations. This notification is expected to encompass SEBI-registered FPIs, pension funds, and SWFs, among others. The CBDT has invited public comments and suggestions on the proposed changes and the forthcoming notification, seeking input from stakeholders in the process."
How angel tax provisions will attract global investments? | Mint - Mint
Read More
No comments:
Post a Comment