The Centre must not link the availability of the clear income tax pass-through regime for venture capital (VC) investments to the flow of funds into specified sectors.

The existing restriction on allowing tax pass-through regime only for VC fund investments into 10 specified sectors should be removed, the Confederation of Indian Industry (CII) has suggested in a paper on Private Equity (PE) and VC funds.

The restrictions have to be removed so as to provide a clear and stable income tax regime for VC/PE funds investing in any sector, the CII paper added.

Simply put, the tax pass-through treatment should be made available for all VC/PE investments irrespective of the sectors where the funds are ultimately invested. Under the tax pass-through regime, income accrued to a VC/PE fund is exempted from taxation, but the same income is taxed in the hands of the investors at the time of distribution of that income. The Centre had, in 2007, drastically altered tax policy so as to limit the clear tax pass-through regime to 10 permitted sectors. The income tax law was amended to restrict tax pass-through to funds invested in nanotechnology, information technology relating to hardware and software development, seed research and development, biotechnology, research and development of new chemicals in pharmaceuticals, production of bio-fuels, building and operating hotel/convention centres, dairy and poultry. The CII paper has noted that significant capital is required in a wide-range of sectors—textiles, automotive components, machine tools, logistics, specialised construction and more—not simply the ten specific sectors.

It has also pointed out that the proposed direct taxes code (DTC) also limits the clear tax pass-through treatment to domestic VC fund investments in specific sectors creating assorted uncertainties and ambiguities for investments outside of these fields.

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