Venture Capitalists: Simplify the tax structure

Venkatesh Ganesh | Updated on January 27, 2018 Published on February 16, 2016

Venture capitalists in India want the government to treat their investments at par with that of entities investing in publicly listed companies in the stock market.

As a run up to the Budget, VCs that BusinessLine spoke to, unanimously voiced their concerns regarding an anomaly that is not creating a level playing field when it comes to investments in startups.

“Investments in unlisted companies or startups are taxed at 33 per cent in the short term and 20 per cent in the long term, which needs correction,” says Saurabh Srivastava, co-founder of Indian Angel Network. The rationale for this demand seems straight forward. While capital gains tax accrued on investments in listed companies are treated as long-term capital gains in nature, which exempts them from paying taxes, the same is not the case with unlisted companies. As a result, entities pay taxes to the tune of 33 per cent (in case it is a short-term investment) and 20 per cent in a normal long-term investment (more than five years).

Anand Lunia, Founder, India Quotient, says the need of the hour is parity of tax treatment for startup investors with other investors, pointing out that this will, in turn, bring in more investments into the country. These things are cropping up as India is witnessing a burgeoning startup ecosystem with around 4,200 startups, in turn, becoming the largest startup-base in terms of volume, according to a recent report by Nasscom and Zinnov.

While the VCs are not asking for an exemption, they are seeking simplification in the investment rules. “Government should simplify the tax structure,” says Ajoy Lodha, Partner, Singhi Advisors, an investment banking firm.

Suchit Punnose, Founder, Red Ribbon Advisory Services, says that a single-window clearance procedure, escrow arrangements and minimum interference from the government will create a conducive environment for startups.

Others like Sanjay Mehta, an angel investor, are seeking clarity on angel tax and are asking the government for tax refunds on a quarterly basis, as it would help in the cash flow. “Clear guidelines on operating framework for foreign investors coming into Alternate Investment Funds (AIFs) as well as tax treatment on income earned by foreigners would go a long way in encouraging the AIF industry as well as attracting additional investments into the country,” says Vimal Bhandari, MD and CEO, Indostar Capital. The industry is also asking to change its existing procurement policies. “Market-relevant product innovation can happen by creating a preferential procurement policy for India-specific innovation, similar to the Defence sector,” says A Vijayarajan, Founder, InnAccel Acceleration. Industry body Nasscom had written to the government last year on issues such as easier rules to register businesses, funding, and simplifying compliance procedures, the responses of which are still awaited.

(with inputs from Priyanka Pani)

Published on February 16, 2016
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