The Indian government is considering adopting FEMA (Foreign Exchange Management Act) in regard to valuation norms for angel tax. The move comes at a time when the Indian Government feels it needs to address issues raised by entrepreneurs, startups, and investors over the angel tax.
Commenting on this, the Finance Ministry made an official statement saying, “The Government is considering several options, including certified valuations by Sebi-registered Category 1 merchant bankers using internationally accepted pricing methodologies. The tax authorities plan to release draft rules within the next seven to ten days.”
According to the Income Tax regulations The fair market value (FMV) is calculated using the discounted cash flow (DCF) or net asset value (NAV) method. Startups generally follow the DCF method, which involves making multiple assumptions and often results in disputes due to their limited assets. The angel tax provision was introduced to prevent potential money laundering, as some fraudulent entities had received overseas funds at inflated valuations.”
The angel tax was introduced in 2012 and applies to investments made in startups by angel investors or venture capitalists. These investments are above the fair market value of the company’s shares which resulted in several startups being taxed at a high rate.
The new proposed FEMA-like valuation norms will be judged on the basis of the value of similar companies in the same industry, which will help determine the fair market value of foreign investments under FEMA.
According to certain reports, the Indian Government is also considering other measures to address these concerns, which also include raising the exemption threshold for startups and structuring the application process for exemptions.
If the new FEMA-like valuation norms for angel tax come into place, they will provide better clarity and surety for investors and startups.
As Indian startups have been struggling to raise funds due to the economic uncertainty in the market and, considering that winter funding had worsened following the collapse of the Silicon Valley Bank in the US, in order to regulate and make it easier for startups, the tax authorities are considering introducing criterion which is, FEMA Act under section 56(2)(vii)(b) of the Income Tax Act.