• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest
• The New Manager

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

D. Murali

Chennai March 30 Venture capital (VC) funds and private equity (PE) firms have been increasingly active in recent times.

For instance, Sequoia Capital has invested $11.5 million in SKS Microfinance, as per a report dated March 29 on www.cnbc.com.

"Sequoia's investment makes SKS the largest for-profit microfinance institution in the world."

VC investment continues to boom in China, says www.cctv.com.

Meanwhile, increasing regulatory attention is being bestowed upon VC and PE activities. The UK Government recently bowed to political pressure and decided to consider using tax policy for the purpose.

"The freewheeling world of hedge funds and their cousins, PE and VC, have for now escaped the tightened oversight imposed on publicly traded companies after Enron and WorldCom," alerts a story on http://knowledge.wharton.upenn.edu, which has already been viewed more than 7,500 times.

What is the position in India? "The provisions related to taxation of venture capital funds (VCFs) and venture capital companies (VCCs) are mainly contained in section 10 (23FB) and section 115U of the Income-Tax Act, 1961," says Mr Radhakishan Rawal, principal consultant, PricewaterhouseCoopers, in a recent interaction with Business Line.

At present, the situation is a happy one for the entities. Because, in terms of the existing provisions of section 10 (23FB) of the Act, the income earned by VCFs/VCCs is exempt from tax. Further, they are given pass-through status.

"That is, when the VCF/VCC distributes income to the investors, the income retains the same character (dividend interest/capital gain, etc.,) and the investor is deemed to have received such income directly from the venture capital undertaking (VCU)," explains Mr Rawal.

Budget 2007 queers the pitch. It proposes to amend the above tax provisions related to VCFs/VCCs.

"As per the proposed amendment, while the VCC/VCF would continue to be entitled to claim exemption only for the income received by it from the VCU, the scope of entities qualifying as VCUs is proposed to be restricted to entities engaged in certain type of activities," states Mr Rawal. Activities that qualify for the purpose include nanotechnology, IT relating to hardware and software development, seed research and development, biotechnology, R&D in new chemical entities in the pharmaceutical sector, production of bio-fuels, building and operating composite hotel-cum-conservation centre with seating capacity of more than 3,000, dairy and poultry industries.

As a corollary, entities not engaged in these activities would not qualify as VCUs; VCFs/VCCs would not enjoy the benefit of Section 10(23FB) for the income received from non-qualifying VCUs.

The proposed amendment, although effective April 1 would indirectly also have a retrospective effect, cautions Mr Rawal. How so? The benefit of Section 10(23FB) would be denied to the income received by VCFs/VCCs from investments made prior to April 1 in entities that now do not qualify as VCUs.

Thus, the amendment creates a piquant situation.

"When the structure was created and the investments were made, the tax benefit were available; the tax benefits are now proposed to be withdrawn/restricted," says Mr Rawal.

"As a consequence of this amendment, one needs to reconsider the tax implication of the investments and determine whether it creates any additional tax burden.

The additional tax liability would depend on legal structure of the pooling vehicle (VCC/VCF), etc."

According to Mr Rawal, the proposed amendment is against the principle of promissory estoppel. "Investors may consider this amendment a breach of trust," he fears.

"If at all the Government wanted to amend the law, the ideal way could have been to ensure that the investments which have already made are not affected by virtue of amendment," he suggests.

"Additionally, the Government may also consider introducing some provisions that give adequate time to the investors to move from one structure to another. This would ensure that the investor faith in the tax policy is maintained."

More Stories on : Venture Capital | Foreign Institutional Investors

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
MRO-TEK gets board nod for buyback

Copyright © 2007, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line