Budget 2018: Private equity, venture capital funds give a thumps up to LTCG tax
Mumbai: The return of long-term capital gains (LTCG) tax on listed shares may attract more funds to private equity and venture capital funds, which are major backers of unlisted companies.
In his budget speech, finance minister Arun Jaitley said LTCG from sale of listed shares and equity mutual fund schemes will now be taxed at 10%, if the total capital gains in a year cross Rs1 lakh. LTCG in unlisted shares (PE and VC funds are major backers of unlisted companies) are currently taxed at 10%; the proposed tax on listed shares ends the advantage enjoyed by the latter, bringing the two categories on par.
“Indian Venture Capital and Private Equity Association, IVCA, welcomes the decision towards parity on long term capital gains between listed and unlisted stocks. The 10% rate is a first step. We hope that eventually, risk-taking, long-term capital invested in unlisted companies will ultimately be taxed at the same rates as public market equity,” said Gopal Srinivasan, chairman, IVCA.
PE/VC underwrite large amounts of risk while making long-term investments in private companies and also focus on building the companies; hence steps towards parity in taxation is welcome, Srinivasan added.
Jaitley said venture capital funds (VCFs) and angel investors need an innovative and special developmental and regulatory regime for their growth. “We have taken a number of policy measures including launching ‘Start-Up India’ program, building very robust alternative investment regime in the country and rolling out a taxation regime designed for the special nature of the VCFs and the angel investors,” said Arun Jaitley.
The government will take additional measures to strengthen the environment for their growth and successful operation of alternative investment funds in India, he added.
Industry experts said the taxation parity has the potential to incentivize more allocation towards the PE and VC asset classes.
“The parity in taxation of gains from investments in listed and unlisted companies now introduced removes the historical tax arbitrage between these asset classes. The industry would hope that the parity should now raise domestic capital allocations to the PE/VC asset classes,” said Subramaniam Krishnan, tax partner, financial services, EY India.
Under the Securities and Exchange Board of India’s alternative investment fund regime, which includes PE, VC and public markets funds, a total of Rs1 trillion of commitments have been raised till date from domestic and foreign investors. Private equity investments were a record $24 billion in 2017 alone.
“A lot of institutional and HNI (high networth individual) money in India was going only toward equity and wasn’t going towards VC and PE. So, now that we have tax parity, which is positive, we are expecting a lot of money flow in the start-up ecosystem,” said Anand Lunia, founding partner at early stage venture capital fund India Quotient.
However, while the move might have introduced some parity between listed and unlisted investments, LTCG tax on listed securities will also affect private equity and venture capital investments in public markets, popularly known as private investments in public equity (PIPE).
“However, the return on equity of private equity/VC/financial investors undertaking private investments in public equity (PIPE) deals using the block/bulk deal window of the stock exchange is impacted with the proposed introduction of 10% long term capital gains tax on listed equity,” said Ravi Mehta, partner, Grant Thornton India LLP.
In order to further boost capital inflows to start-ups, the finance minister also said the government will come up with a policy for hybrid instruments for fundraising by start-ups.
“Hybrid instruments are suitable for attracting foreign investments in several niche areas, especially for the start-ups and venture capital firms. The government will evolve a separate policy for the hybrid instruments,” the finance minister said.
Venture capital investors welcomed the move, saying it will increase the capital pool available to start-ups.
“If you look at other emerging and developed countries, there are hybrid products. This hybrid product will give opportunities as new asset class for Indian investors,” said Anil Joshi, managing partner, Unicorn India Ventures, an early stage venture fund.
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