I-T Department updates rules for startup equity valuation
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The Income Tax Department has issued new regulations concerning the valuation of equity and compulsorily convertible preference shares issued by startups to both resident and non-resident investors.
These regulations, effective from Monday (September 25), amend Rule 11UA of the Income Tax Rules. Under these changes, the Central Board of Direct Taxes (CBDT) now allows the valuation of compulsorily convertible preference shares (CCPS) to be determined using the fair market value of unquoted equity shares.
The revised regulations also maintain the inclusion of five valuation methods initially proposed in the draft rules for assessing funds received from non-resident sources.
These methods are: (i) Comparable Company Multiple Method, (ii) Probability Weighted Expected Return Method, (iii) Option Pricing Method, (iv) Milestone Analysis Method, and (v) Replacement Cost Method.
A few businessmen have remarked that the amendments to Rule 11UA of the Indian Income Tax Act will introduce positive changes.
They said that these changes grant taxpayers flexibility by offering multiple valuation methods, simplify the process of considering the valuation date, encourage venture capital investments, facilitate investments from specified entities, provide clarity regarding compulsorily convertible preference shares (CCPS), and promote foreign investments.
