In what could be a landmark move towards ease of doing business for startup investors that could slingshot investments into Indian startups, the Standing Committee on Finance chaired by BJP leader Jayant Sinha has “strongly recommended” to the Centre to abolish tax on Long Term Capital Gains (LTCG) for all investments in startups. In a report submitted to the Lok Sabha speaker last week, the committee said that investments made by angel funds, alternative investment funds, investment LLPs should be exempted from taxation of LTCG for at least the next two years to boost investments during the Covid pandemic. “After this 2 year period, the Securities Transaction Tax (STT) may be applied to CIVs so that revenue neutrality is maintained,” the report added.
It is something that industry had wanted for a very long time and is very critical because investments in stock markets don’t create new jobs and business and doesn’t add value whereas startups are what India needs. In Covid, startups had come up with all the solutions. So if we encourage domestic investments to go to startups and not just trading, stocks and shares, it would be much more valuable to the country. The downside is very little,” Saurabh Srivastava, Chairman, Indian Angel Network told Financial Express Online.
According to the industry representatives, there has been a disparity between LTCG taxation of foreign versus and domestic investors. While LTCG earned by foreign investors in private businesses are levied 10 per cent tax, domestic venture capital and private equity investors are taxed at 20 per cent with “an enhanced surcharge of 37 per cent.”
“As per industry representatives the complex tax regime dampens the enthusiasm of investors in the PE/VC fund space eyeing Indian investments and there is a need to
incentivise large PE/VC funds to invest in the private sector and provide the necessary capital to cash crunched companies,” the committee said. Drawing comparisons with other startup ecosystems, it added that Singapore, the US, the UK and other EU countries do not tax capital gains earned by foreign investors.
In order to reduce Indian startups’ dependence on the US and Chinese investors for funding needs, the committee opined requirement for multiple large domestic funds powered by domestic capital to support India’s growth in the number of unicorns. “Committee is of the opinion that SIDBI Fund-of-Funds vehicle should be expanded and fully operationalised/utilised to play an anchor investment role. SIDBI should play a pivotal role in disbursing more funds that would help startups and unicorns to scale up significantly.”
The Fund of Funds, which was established in January 2016 with a corpus of Rs 10,000 crore had committed Rs 3123.20 crore to 47 SEBI registered Alternative Investment Funds (AIFs) as on November 21, 2019. These AIFs had raised a corpus fund of Rs 25,728 crore while Rs 695.94 crore has been drawn from the FFS. Rs 2,669.83 crore were invested into 279 startups.
“There will be more private funds that will come up and SIDBI will have the option to invest. Also, overseas funds, corporates, family offices, angels, everybody will get interested,” added Srivastava.
Among other suggestions made by the committee to boost startup investments were:
- Large financial institutions in India should be encouraged to channelise a proportion of their investible surplus into domestic funds which would bring in much-needed
additional domestic capital for startup investments.
- SEBI should allow VC funds to invest in NBFCs to help enhance their capital base.
- AIFs should be allowed to list on capital markets in order to create a permanent source of capital for the startup ecosystem.
- Sectors in which foreign VCs are allowed to invest should be expanded to sectors
where FDI is permitted as “this route provides a flexible investment framework and hence will be able to attract significant capital in the economy,” the committee said.
- In order to enhance the number of sources for startup funding, companies and LLPs should be allowed to invest in startups without being classified as NBFCs by the RBI. “This can be done by allowing only debt-free companies and LLPs to be kept out of the NBFC designation,” the committee added.