The Finance Act, 2024 has introduced notable changes to the valuation requirements for private limited companies, by proposing removal of Section 56(2)(viib) of the Income Tax Act with effect from 1st April, 2025. This section imposes tax on shares issued by private limited companies at a price exceeding the Fair Market Value (FMV). This taxation is commonly referred to as Angel Taxation.
Current Requirements
FMV of shares is determined according to Rule 11UA(2) of the Income Tax Rules. This rule prescribes the use of the net asset method based on a specific formula or use of other International valuation methods supported by a Merchant Banker’s report.
To comply, private companies issuing shares have been required to obtain:
- A valuation report from a Registered Valuer as per the Companies Act.
- A valuation report from a Merchant Banker as per Income Tax Regulations.
Amendment made in Finance Act, 2024
Finance Act, 2024 proposes to eliminate the requirement under Section 56(2)(viib) with effect from 1st April, 2025. Moving forward, the issuance of shares will no longer require a Merchant Banker’s valuation report. Instead, shares can be issued at any price based on the valuation report from a Registered Valuer alone.
Impact and Benefits
This amendment is set to streamline the share issuance process for Start ups by:
- Removing the dual valuation report requirement.
- Reducing compliance costs and administrative burden.
- Providing greater flexibility in pricing shares based on professional valuations.
Disclaimer
The information provided in this blog is for general informational purposes only and is not intended to be legal, tax, or professional advice. Readers should consult their own advisors for specific guidance on how these changes may impact their individual circumstances.