STARTUP FUNDING TO GET ATTRACTIVE AS HOUSE PANEL SUGGESTS ABOLISHING LTCG TAX ON ANGEL INVESTMENTS

In what could be a landmark move towards ease of doing business for startup investors that could slingshot investments into Indian startups, the Standing Committee on Finance chaired by BJP leader Jayant Sinha has “strongly recommended” to the Centre to abolish tax on Long Term Capital Gains (LTCG) for all investments in startups. In a report submitted to the Lok Sabha speaker last week, the committee said that investments made by angel funds, alternative investment funds, investment LLPs should be exempted from taxation of LTCG for at least the next two years to boost investments during the Covid pandemic. “After this 2 year period, the Securities Transaction Tax (STT) may be applied to CIVs so that revenue neutrality is maintained,” the report added. An excerpt from the report read as follows:

The Committee note the administrative and taxation reforms effected so far with respect to companies in general and startups in particular.In addition to these reforms, the Committee would like to strongly recommend that tax on Long Term Capital Gains be abolished for all investments in startup companies (as designated by DPIIT) which are made through collective investment vehicles (CIVs) such as angel funds, AIFs, and investment LLPs. At a minimum, this should be done for at least the next 2 years to encourage investments during the pandemic period. After this 2 year period, the Securities Transaction Tax (STT) may be applied to CIVs so that revenue neutrality is maintained. Investments by CIVs are transparently done and have to be done at fair market value. Thus it is easy to calculate the STT associated with these investments. This can be done in lieu of imposing LTCG on these CIVs and to make the taxation system fairer, less cumbersome, and transparent. This will also ensure that investments in unlisted securities are on par with investments in listed securities.

At present, LTCG earned by foreign investors in private companies attracts taxation at concessional rate of 10%, in comparison to the domestic VC/PE investments being taxed at 20% (for LTCG) with an enhanced surcharge of 37%. The panel has also proposed that the sectors in which Foreign Venture Capital Investor (FVCIs) are allowed to invest should be expanded to include all sectors where Foreign Direct Investment (FDI) is permitted, as this route provides a flexible investment framework and hence will be able to attract significant capital in the economy.

The committee also recommended that the exemption for income on investments made before March 31, 2024, subject to the investment being held for a period of at least 36 months as incentivised in the Finance Act, 2020, should be provided to long-term and patient capital invested across all sectors.

To support start-ups, the government is working on credit guarantee scheme which would facilitate easy lending to these companies.

Besides, the contours of a seed fund scheme is also being worked upon. This will help start-ups, especially in the ideation to the proof of concept phase, to raise funds.