Analysis of Changes in Taxation of Share Premium in India
By Akshat Pande, on June 7, 2023
POSTED IN Taxation,
Section 56 (viib) of the Income Tax Act, 1961 (“Act”) up till now provided that in case where an unlisted company issue shares to any person being a resident at a consideration which exceeds the fair value of such shares, the amount of excess consideration shall be treated as a taxable income of the Company.
This provision doesn’t apply (i) where investment is received by a VCU from a VCF or an AIF or an IFSC registered fund (ii) by a company from notified persons.
FMV shall be calculated as per Rule 11 U and 11UA of Income Tax Rules (‘Rules’) or as calculated by the company and acceptable to the income tax authorities, whichever is higher.
Relevant definitions are provided in Rule 11U and 11 UA provides for detailed methods of valuation. Some important definitions are as follows:
i. Balance sheet means audited balance sheet drawn up on valuation date or in some cases of any date prior to that so far it has been adopted in an AGM;
ii. Merchant Banker means merchant banker registered with SEBI;
iii. Valuation date means the date on which the share subscription money is received
FMV can be determined at the option of the company issuing the shares, either on book value basis based on the balance sheet or DCF method basis as certified by a merchant banker provided that the value is to be determined as on the valuation date.
Amendments and their impact
|1.||The words being a resident shall be omitted by virtue of Finance Act, 2023, w.e.f. 1-4-2024.||The provisions of the taxation on share premium which is over and above the FMV (“Share Premium Tax”) shall apply even in case where investor is a non- resident.|
|2.||Certain class of investors exempted (Notification dated 24th of May, 2023 no. S.O. 2274(E).)||Following types of investor entities exempted from applicability of Share Premium Tax:
i. Investors having more than 75% shareholding by the government ex. Banks, sovereign funds etc;
ii. Banks or entities involved in insurance business;
iii. FPI’s, endowment funds, pension funds, broad based pooled investment funds having more than 50 investors, not being a fund like a hedge fund established or incorporated or is a resident 21 select countries.
|3.||Angel Tax exemption to non-resident investors (Notification dated 24th May, 2023 no. S.O. 2275(E))||Exemption from applicability of Share Premium Tax provided in (1) above (i.e. related to non-resident investors) extended to investors in companies which qualify for tax exemptions available to start-ups as per 2019 notification, so far they comply with the conditions provided therein.|
|4.||Changes in definition of FMV (Rule 11UA) (to be notified)||FMV may be calculated by either of the methods, where:
i. If investor is a non-resident – (i) by book value method, (ii) DCF as certified by a merchant banker, (iii) value at which shares have been offered to a VCF so far as investment is done within 90 days of it, (iv) by any of following methods as certified by a merchant banker – comparable company multiple method, probability weighted expected return method, option pricing method, milestone analysis method, replacement cost method (v) value at which shares have been offered to any other exempted entity (such as ones covered in (2) above) so far as investment is done within 90 days of it.
ii. If investor is a resident – (i) by book value method, (ii) DCF as certified by a merchant banker, (iii) value at which shares have been offered to a VCF so far as investment is done within 90 days of it, (iv) value at which shares have been offered to any other exempted entity (such as ones covered in (2) above) so far as investment is done within 90 days of it.
|Valuation Date can be 90 days prior to date of issue of shares if valuation is certified by the merchant banker||A difference of 10% in issue price and valuation price shall be ignored.|