The Standing Committee on Finance recommended the Central Government to abolish the tax on Long Term Capital Gains for investments in startups companies that can be done by collective investment like Alternate Investment Funds, angel funds and investment LLP.
Report by the Standing Committee on Finance
Report by the Standing Committee on Finance titled as “Financing the startup ecosystem” submitted to the Lok Sabha Speaker stating that the committee on finance has strongly suggested that the tax on Long Term Capital Gains to be eliminated for all investments in startup companies that are made through collective investment like Alternate Investment Funds, angel funds and investment LLP. To encourage investment during this pandemic period, the tax should be abolished for at least next 2 years.
The recommendation of the report says that, “After this 2 year period, the Securities Transaction Tax can be applied to Collective Investment Vehicles so that neutrality of revenue is maintained. Investments by Collective Investment Vehicles are done transparently and at fair market value. Thus it is easy to calculate the Securities Transaction Tax related with the investments. This can be done instead of imposing Long Term Capital Gains on these Collective Investment Vehicles and to make the taxation system less burdensome, fair and transparent. This can also make certain that investments in unlisted securities are on par with investments in listed securities.”
The report also called to institute a level for smooth functioning for domestic investments in relation to foreign investments and domestic listed securities with reference to unlisted securities. At present, Long Term Capital Gains earned by foreign investors in private companies draws taxation at concessional rate of 10%. Whereas, the domestic Venture Capital/Private Equity investments are being taxed at 20% for LTCG with surcharge of 37%.
Reason for Abolishing Tax
Given that the Indian economy is stumbling under the post COVID – 19 pandemic and a variety of sectors needs capital to recover. The Committee suggested that the exclusion of income on investments made before 31 March, 2024, subject to the investment being held for a period of at least 36 months as an incentive in The Finance Act, 2020, shall provide long-term and patient capital investment across all the sectors.
The Committee also suggested that in line with the universal practice, large number of financial institutions in India should be encouraged to project a fraction of their surplus funds into domestic funds which can bring in much required additional domestic capital for start-up investments.
Steps taken by the Committee
The steps taken by the committee includes the following details:-
Encouraging PFRDA & NPS
Pension Fund Regulatory and Development Authority and National Pension Scheme are encouraged to invite bids from professional fund managers for running a fund-of-funds program on which SIDBI will also be eligible to participate.
Major Banks should Join Hands
Major Banks should join hands to float a fund-of-funds. Moreover, the current exposure limits applied in the banks need to be improved and authorization should be granted to invest in Category III Alternate Investment Funds.
Investment by IRDAI
Insurance companies should be given autonomy to invest in fund-of-funds by IRDAI as well as directly in Venture Capital/Private Equity funds along with a high exposure to VC/PE. The investments made by insurance companies in Alternate Investment Funds should be created under a separate category while calculating the exposure limits and not associated with other investments under ‘unapproved investments’.
Encouraging Foreign Development Finance Institution
Foreign Development Finance Institutions should be encouraged to participate with local asset management companies to set up fund-of-funds structure or direct Venture Capital/Private Equity funds, mostly in healthcare, social impact and venture or start-up sectors.
The Standing Committee on Finance noted that successful Initial Public Offerings of Real Estate Investment Trusts and Infrastructure Investment Trust have already shown that asset selection can be packaged together to attract precise investor type and thus will like to recommend that NBFCs can also be allowed to list on stock exchange to be able to attract a larger investment pool. So for investment in start-up companies the committee recommended the Central Government should abolish the tax on Long Term Capital Gains.