Income Tax

Simplifying Angel Tax: Proposed Changes and Excluded Entities

Leave a Comment / Income Tax, Updates / / June 14, 2023

Angel Tax has been a subject of concern for startups and investors in India. To address these concerns and promote ease of doing business, the Central Board of Direct Taxes (CBDT) has proposed changes to Rule 11UA and announced the notification of excluded entities. This blog aims to provide a user-friendly explanation of these proposed changes and their potential impact on startups and investors.

Angel Tax refers to the income tax levied on the consideration received by a company for issuing shares if the consideration exceeds the Fair Market Value (FMV) of the shares. It was introduced to curb money laundering and prevent the inflow of black money into startups. However, its implementation has raised concerns due to its impact on genuine startups and investors.

Proposed Changes to Rule 11UA:

  1. Additional Valuation Methods: Currently, Rule 11UA prescribes the Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods for valuing shares for resident investors. The proposed changes seek to expand the valuation methods to include five additional methods specifically for non-resident investors. This expansion aims to provide more flexibility and options for determining the FMV of shares during investments.
  2. Price Matching for Resident and Non-Resident Investors: Under the proposed changes, if a company receives consideration from a non-resident entity specified by the Central Government, the FMV of the equity shares for both resident and non-resident investors can be determined based on the price of the equity shares corresponding to such consideration. This provision is subject to two conditions: the consideration should not exceed the aggregate consideration received from the specified entity, and the consideration should be received within 90 days of the share issuance.
  3. Acceptable Valuation Report: To streamline the valuation process, the proposed changes suggest that the valuation report by a Merchant Banker will be acceptable if it is not more than ninety days old from the date of share issuance. This provision aims to ensure the accuracy and relevance of valuation reports, considering the dynamic nature of the market.
  4. Safe Harbor Provision: Recognizing the impact of forex fluctuations and other economic indicators on the valuation of unquoted equity shares during multiple rounds of investment, the proposed changes provide a safe harbor of a 10% variation in value. This provision aims to accommodate reasonable variations in valuation, thereby reducing unnecessary tax burdens on startups and investors.

Notification of Excluded Entities: The CBDT has also proposed to notify certain classes of non-resident investors to whom section 56(2)(viib) of the Income-tax Act shall not be applicable. These include:

  • Government and government-related investors such as central banks, sovereign wealth funds, and international organizations controlled by the government.
  • Banks or entities involved in the insurance business subject to applicable regulations in their respective countries.
  • Entities registered as Category-I Foreign Portfolio Investors with the Securities and Exchange Board of India.
  • Endowment funds associated with universities, hospitals, or charities.
  • Pension funds established under the law of foreign countries.
  • Broad-based pooled investment vehicles or funds with more than 50 investors, excluding hedge funds or funds employing complex trading strategies.

The proposed changes to Rule 11UA and the notification of excluded entities represent a significant step towards simplifying Angel Tax and supporting the growth of startups in India. These changes aim to provide more valuation options, align the treatment of resident and non-resident investors, and exempt certain entities from the purview of Angel Tax. If implemented, these changes will likely boost investor confidence and encourage investments in the Indian startup ecosystem, contributing to the country’s economic growth and innovation.

Disclaimer: This blog post has been written based on the information provided by the Ministry of Finance through the Press Information Bureau (PIB). The content of this blog is intended for informational purposes only and should not be considered as professional or legal advice. Readers are encouraged to refer to the official sources and consult with relevant authorities or professionals for accurate and up-to-date information regarding Angel Tax and related regulations. The author and the platform do not assume any responsibility or liability for any actions taken based on the information provided in this blog.

Simplifying Angel Tax: Proposed Changes and Excluded Entities Read More »

Understanding Small Debit/Credit Transactions under LRS and TCS in India

Leave a Comment / Income Tax, Updates / / May 20, 2023

The Liberalized Remittance Scheme (LRS) in India has opened up avenues for individuals to remit money abroad for various purposes, including small debit/credit transactions. However, it is essential to be aware of the provisions regarding Tax Collected at Source (TCS) associated with such transactions. In this blog, we will delve into the details of small debit/credit transactions under LRS and the implications of TCS.

What is the Liberalized Remittance Scheme (LRS)?

The Liberalized Remittance Scheme is a framework established by the Reserve Bank of India (RBI) that permits Indian residents to remit a certain amount of money abroad for specified purposes. These purposes include travel, education, medical treatment, investment in foreign stocks, purchase of property abroad, and more. The LRS enables individuals to diversify their financial assets, gain international exposure, and fulfil personal and financial goals.

Tax Collected at Source (TCS) is a mechanism implemented by the Indian government to collect tax at the source of certain transactions. Under the provisions of the Income Tax Act, individuals remitting money abroad for specified purposes under the LRS may be liable to pay TCS if the total amount exceeds a prescribed threshold.

Small Debit/Credit Transactions and TCS: Regarding small debit/credit transactions under LRS, the applicability of TCS depends on the total amount remitted in a financial year. As of the information available, if the cumulative amount remitted exceeds INR 7 lakh in a financial year, TCS is levied at the rate of 20%. This means that if an individual remits a total of INR 7 lakh or more for specified purposes within a financial year, 20% of the amount above the threshold will be collected as TCS by the authorized dealer (typically a bank) and deposited with the government.

Implications and Considerations:

  1. TCS Credit: The TCS amount collected by the authorized dealer is reflected in the individual’s Form 26AS, which acts as a tax credit statement. It can be claimed while filing the income tax return, reducing the overall tax liability.
  2. Threshold Limit: It is crucial to monitor the cumulative amount remitted throughout the financial year to assess the applicability of TCS. Transactions below the threshold of INR 7 lakh will not attract TCS.
  3. Tax Implications: TCS is collected at the time of remittance, and it is important to factor in this additional tax liability while planning finances and ensuring compliance with tax laws.
  4. Updates and Changes: The threshold limits and TCS rates may be subject to revision based on updates in the tax laws and regulations. It is advisable to refer to the latest guidelines issued by the RBI and consult with a tax professional or authorized dealer for accurate and up-to-date information.

Conclusion: The Liberalized Remittance Scheme (LRS) has provided Indian residents with the opportunity to engage in small debit/credit transactions abroad for various purposes. However, it is essential to understand the provisions regarding Tax Collected at Source (TCS) associated with these transactions. Monitoring the cumulative remittances and being aware of the threshold limit and TCS rates can help individuals comply with tax regulations while enjoying the benefits of international transactions under LRS. It is advisable to stay updated with the latest guidelines from regulatory authorities and seek professional advice for personalized financial planning and tax compliance.

Understanding Small Debit/Credit Transactions under LRS and TCS in India Read More »

Income Tax Department Unveils Major Tax Evasion Case in West Bengal

Leave a Comment / Income Tax, Updates / / May 17, 2023

In a significant development, the Income Tax Department recently conducted search and seizure operations on a prominent business group operating primarily in the North Bengal region of the State of West Bengal, uncovering instances of tax evasion and unaccounted cash transactions. The group, which is predominantly controlled by an individual with an active political background, is involved in various business ventures, including the production and sale of edible oils, real estate, and chemicals. The operation covered a total of 23 premises spread across West Bengal and Guwahati, Assam.

The search action conducted by the Income Tax Department revealed startling findings regarding the business group’s attempts to suppress its yield and engage in unaccounted cash sales of edible oils and De-Oiled Rice Bran (DORB). Evidence of numerous cash transactions, deliberately omitted from regular books of account, was discovered during the operation. Handwritten notes, documents, and digital evidence containing extracts of these cash transactions were seized, along with parallel cash books and fraudulent expense claims. Preliminary investigations indicate unaccounted income of over Rs. 40 crores.

Unearthing Additional Financial Irregularities

During the search operation on a close business associate of the main business group, who is a prominent exporter of agro-products in Malda district, incriminating documents relating to cash payments in land acquisition worth approximately Rs. 17 crores were found. Furthermore, details regarding unaccounted cash receipts amounting to about Rs. 100 crores were also discovered.

As a result of the search action, the Income Tax Department successfully seized unaccounted cash totalling Rs. 1.73 crore. Additionally, unaccounted jewellery with an estimated value of Rs. 1 crore was also confiscated.

Ongoing Investigations: The search and seizure operations conducted by the Income Tax Department have shed light on a substantial tax evasion case with far-reaching implications. The revelations have triggered further investigations into the intricate financial web of the business group and its associates. The department is committed to thoroughly examining the evidence, verifying financial records, and identifying any other irregularities that may exist.

The recent search and seizure operations conducted by the Income Tax Department in North Bengal have uncovered a significant tax evasion case involving a business group with a strong presence in the region. The revelations of unaccounted cash sales, parallel cash books, and fraudulent expense claims point towards a deliberate attempt to evade taxes and manipulate financial records. The ongoing investigations will provide a clearer understanding of the extent of the tax evasion and the parties involved. Such actions by the Income Tax Department serve as a stern reminder to individuals and businesses alike that attempts to evade taxes will not go unnoticed, emphasizing the importance of complying with tax laws and maintaining transparent financial practices.

Disclaimer: The information provided in this article is based on the press release by the Income Tax Department.

Income Tax Department Unveils Major Tax Evasion Case in West Bengal Read More »

Scroll to Top