The Finance Ministry is clearly in the camp that believes that capital contribution to start-ups should not be characterised as “income”, and therefore, should not be charged to to income tax. But the real challenge is, it has to walk a fine policy line as it needs to ensure that the capital contribution route is not misused to launder money, according to a top Finance Ministry official.

“Prima facie, contribution received by a company as part of share sale is certainly not income. However, similar structures have been misused for money laundering,” Subhash Garg, Secretary, Economic Affairs, told a Private Equity Conclave organised by IVCA here on Friday.

Garg highlighted that the main challenge before a policymaker is balancing the concerns of inconvenience to Alternate Investment Funds and misuse of such vehicles for money laundering.

He said there is a need for a solution that met both these objectives and that the government is working on such a solution.

“I certainly know that the misuse cannot be blocked 100 percent. But we can find a reasonable solution,” he added.

‘No wrong intent’

Garg also made it clear that there was no deliberate effort on the part of the tax department to put start-ups through difficulties.

“On Angel Tax, there is a bit of conflict that the government has to resolve. However, I did not notice any intention on the part of any government department involved with the so-called ‘angel taxation’ that such and such industry should be taxed unnecessarily for capital contribution received by them,” he said.

Garg also said that more infrastructure investment trusts (InviTs) will come into the Indian market in the coming days. “We had seen quite a few InvITs coming in. We are also waiting for the first REIT to come into play. Hopefully, it will come soon and that would set the stage for the scaling up of more such vehicles,” Garg said.

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