CBDT extends safe harbour option to convertible preference shares

New Delhi, Sep 26, 2023 

Move will help startups and encourage foreign investment, say experts 

The Central Board of Direct Taxes (CBDT) has further relaxed angel tax rules for unlisted startups by extending the 10 per cent safe harbour to convertible preference shares, a relief which was yet restricted to equity shares.

A CBDT notification introduced a mechanism for arriving at fair market value of convertible preference shares (CCPS) for investments by resident and non-resident investors.

Almost all fresh investments by venture capitalists funds in startups have historically been through CCPS. However, a leeway of 10 per cent was available for only equity shares.

The move will help startups and encourage foreign investment, according to experts.

“The extension of 10 per cent safe harbour to CCPS investments as it was earlier meant for equity shares will give necessary margin of safety for taking care of foreign exchange fluctuations and is a welcome move," said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.

The notification said that the valuation date can be adjusted to the extent of 90 days where the date of the merchant banker's valuation report is not more than 90 days (prior to the date of issue of shares under valuation) then such date can be deemed be the valuation date, if the taxpayer so chooses.

The notified Rule 11UA of the Indian Income Tax Act, effective from September 25, introduced significant improvements in the valuation process for unquoted equity shares. These changes offer taxpayers a broader range of valuation methods to choose from, including internationally recognized approaches, thereby attracting foreign investments and fostering clarity, said Amit Agarwal, partner, Nangia & Co LLP.

The latest rule is in addition to May 26 notification issued draft rules for valuation of equity investments made in unlisted startups.

[The Business Standard]