In a bid to give a boost to investments in start-ups, a committee headed by Infosys Founder Narayana Murthy has suggested a slew of measures, including creating a favourable tax environment, making safe-harbour effective for managing funds from India and reforming the regulatory environment for Alternate Investment Funds (AIFs).

Angel capital, venture capital and private equity are collectively referred to as AIFs. SEBI had appointed the committee to suggest ways for further development of the alternative investment and start-up ecosystem in India.

If the regulatory issues are streamlined, AIFs can attract large capital flows to potentially reach a size of as much 2 per cent of GDP.

“The tax recommendations are aimed at bringing about ease of doing business ensuring neutrality, clarity, consistency and certainty in tax policy; helping increase the confidence of investors, fund managers and entrepreneurs; and establishing parity in tax policies between alternative investments and public market investments,” the report submitted by the panel said.

The panel has said the tax pass-through should be made to work effectively: The tax pass-through system of taxation of AIFs ensures that investors do not pay more tax than they would, had they made the investments directly themselves. “The exempt income of AIFs should not suffer tax withholding of 10 per cent, losses incurred by AIFs should be available for set-off to their investors, and non-resident investors should be subject to rates in force in the respective Double Tax Avoidance Agreements,” the panel has suggested.

The report recommends the introduction of STT for private equity and venture capital investments, including SEBI-registered AIFs and has parity with the taxation of investments in listed securities. “Given the high risk and relatively illiquid and stable nature of private equity and venture capital, it needs to at least be treated at par with volatile, short-term public market investments for taxation,” the panel said.

Hemal Mehta, Senior Director, Deloitte India, said, “There were multiple practical challenges on taxation of all the categories of AIFs which have been presented effectively in the report and practical solutions are also offered. This will certainly give a lot of clarity to the sponsors of domestic funds and their managers. “

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