Central Board of Direct Taxes (CBDT) has issued Notification No. 81/2023 to amend the provision regarding determination of Fair Market Value (FMV) of unquoted equity shares under the Income Tax Rules, 1962.
Following are the key amendments of the Notification:
1. Existing Rule 11UA (2) relating to Determination of Fair Market Value has been substituted in the following manner:
(A) Fair market value of unquoted equity shares where consideration for issue of shares exceeds the face value of such shares, on the valuation date, shall be determined under following points mentioned in (a),(b),(c) or (e) at the option of the assessee where the consideration received by the assessee is from a resident and under points (a) to (e) at the option of the assessee, where the consideration received by the assessee is from a non-resident, in the following manner:-
a. the fair market value of unquoted equity shares = (A–L)× [PV/PE], description of the formula is provided in the notification attached herewith.
b. the fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method;
c. Incase any consideration is received by a venture capital undertaking for issue of unquoted equity shares, from a venture capital fund or a venture capital company or a specified fund, the price of the equity shares corresponding to such consideration may, at the option of such undertaking, be taken as the fair market value of the equity shares to the extent the consideration from such fair market value does not exceed the aggregate consideration that is received from a venture capital fund or a venture capital company or a specified fund.
Provided that the consideration has been received by the undertaking from a venture capital fund or a venture capital company or a specified fund, within a period of ninety days before or after the date of issue of shares which are the subject matter of valuation.
d. the fair market value of the unquoted equity shares determined by a merchant banker in accordance with any of the following methods:
(i) Comparable Company Multiple Method;
(ii) Probability Weighted Expected Return Method;
(iii) Option Pricing Method;
(iv) Milestone Analysis Method;
(v) Replacement Cost Methods;
e. Incase any consideration is received by a company for issue of unquoted equity shares, from a class or classes of persons as may be notified by the Central Government in this behalf, the price of the equity shares may be taken as the fair market value of the equity shares to the extent the consideration from such fair market value does not exceed the aggregate consideration that is received from the notified entity.
Provided that the consideration has been received by the company from a class or classes of persons as may be notified by the Central Government in this behalf, within a period of 90 days before or after the date of issue of shares which are the subject matter of valuation.
(B) Fair market value of compulsorily convertible preference shares shall be the value, on the valuation date, as determined–
(i) in accordance with the provisions of sub points aforesaid in (b), (c), or (e) of point (A), at the option of the assessee, or based on the fair market value of unquoted equity shares determined in accordance with sub-points (a), (b), (c), or (e) of point (A), at the option of the assessee, where such consideration is received from a resident; and
(ii) in accordance with the provisions of sub points (b) to (e) of point (A), at the option of the assessee, or based on the fair market value of unquoted equity shares determined in accordance with sub-points (a) to (e) of point (A), at the option of the assessee, where such consideration is received from a non-resident.
2. Insertion of new sub-rules after Rule 11UA (2) as mentioned below :
(1) Incase the date of valuation report by the merchant banker is not more than 90 days prior to the date of issue of shares which are the subject matter of valuation, such date may, at the option of the assessee, be deemed to be the valuation date.
(2) For the purposes of point (A) or point (B) mentioned above, where the issue price of the shares exceeds the value of shares as determined in accordance with-
(i) sub-point (a) or (b) of point (A), for consideration received from a resident, by an amount not exceeding 10% of the valuation price, the issue price shall be deemed to be the fair market value of such shares;
(ii) sub-point (a) or (b) or (d) of point (A), for consideration received from a non- resident, by an amount not exceeding 10% of the valuation price, the issue price shall be deemed to be the fair market value of such shares.
For further details please refer the attached document.
Source: Central Board of Direct Taxes
