The Indian start-up ecosystem had its shining moment in 2021; India clocked over ₹5.5-lakh crore in venture capital and private equity investments — its highest ever.

The government now wants to expand this growth by setting up an expert committee to evaluate the ecosystem and suggest measures to ensure smoother sailing for the venture capital ecosystem.

“Scaling the ecosystem will require holistic examination of regulatory aspects and other frictions. An expert committee will be set up to evaluate and suggest measures,” FM Nirmala Sitharaman said during the Union Budget 2022. The FM also noted that measures like MIIF and SIDBI Fund of Funds have had a multiplier effect in promoting the start-up ecosystem.

‘Long standing concerns’

Industry experts, however, remained unsatisfied and seek more clarity regarding the disparity in certain categories of taxes in the start-up ecosystem.

Rameesh Kailasam, CEO, IndiaTech.org, told BusinessLine, “A lot of capital is coming into India, especially around start-ups thanks to India listing now being possible. Many start-ups are emerging in a promising manner, both in terms of innovation and maturity, but there are still several concerns around taxation and the treatment of capital.”

“The expert committee has been created to look into many such issues. The government has been assuring investors and now it has finally indicated setting up of an expert committee and putting a mechanism in place,” he added.

Ankur Pahwa, E-commerce and Consumer Internet Leader, Transactions Diligence Partner, EY India, said, “While a committee set-up for the PE/VC space may be a welcome move, what is needed is quicker resolution to long-standing issues of the industry such as very high tax rates for short-term assets (as compared to domestic investors), clarity on the taxability of “carry” structures, enabling taxability of ESOP to liquidity events for all start-ups, aligning the holding period for long-term asset classification to 12 months, etc.”

Tax rationalisation

Anirudh. A. Damani, Managing Partner, Artha Venture Fund, said, “Though the recognition of the start-up ecosystem’s contribution was welcome, I am quite disappointed that the government hasn’t done more to rationalise the taxation between listed and unlisted investments — that would have encouraged more participation of investors in the ecosystem.”

“Alternatively, the government should have provided tax benefits for making investments in the start-up space which, although riskier than the listed space, is also critical for the nation, as recognised by the hon’able FM in her speech. I look forward to the active actions by the ‘expert committee’ that will be setup for the PE /VC space. I truly hope that it is not simply for academic purposes and has a wide participation to include all stakeholders,” he added.

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