Home >Companies >Start-ups >Parliamentary panel suggests abolishing LTCG tax on startups
CII is the number used to arrive at the inflation-adjusted cost of acquisition of assets and investments while calculating LTCG from such assets (Photo: iStock)
CII is the number used to arrive at the inflation-adjusted cost of acquisition of assets and investments while calculating LTCG from such assets (Photo: iStock)

Parliamentary panel suggests abolishing LTCG tax on startups

  • The outbreak of covid-19 pandemic caused significant demand contraction, disrupted supply chains and has stalled investment
  • An industry official said that the panel has given voice to a longstanding request of startups

A Parliamentary panel has proposed tax incentives for start-ups including scrapping long term capital gains (LTCG) tax on investments in new age firms saying that a strong start up ecosystem can propel investments, jobs and demand creation.

The Parliamentary standing committee on finance led by Jayant Sinha said in its report tabled in Parliament said that it “would like to strongly recommend that tax on long term capital gains be abolished for all investments in start-up companies (as designated by the department for promotion of industry and internal trade) which are made through collective investment vehicles such as angel funds, alternate investment funds and investment LLPs."

The committee said that the abolition of long-term capital gains tax should be for at least the next two years to encourage investments during the pandemic period.

After this period, Securities Transaction Tax (STT) may be applied to such so that revenue neutrality is maintained, the panel said. STT is now levied only on listed securities and the panel believes that applying it to unlisted shares too will bring parity between the two.

“Investments by collective investment vehicles are transparently done and have to be done at fair market value. Thus it is easy to calculate the STT associated with these investments. This can be done in lieu of imposing LTCG on these CIVs (collective investment vehicles) and to make the taxation system fairer, less cumbersome, and transparent. This will also ensure that investments in unlisted securities are on par with investments in listed securities," the panel noted.

The outbreak of covid-19 pandemic caused significant demand contraction, disrupted supply chains and has stalled investment. The committee said that the country’s ability to grow and show resilience after the pandemic will be dependent on building a strong startup ecosystem that can propel investment, jobs, and demand creation. It also said that there is need to provide adequate growth capital--debt and equity--to the entrepreneurs.

“The Committee therefore believes and would urge that a strong support system to finance the startup ecosystem should be put in place to drive a sharp post-pandemic revival and sustainably high economic growth thereafter," it said. “Through this (startup) ecosystem, innovators and entrepreneurs develop and launch solutions to solve real-world problems faster and at scale," it said.

An industry official said that the panel has given voice to a longstanding request of startups. “Investments into startups are in the form of primary investments into the company, which in turn generates new assets, economic growth and jobs. Taxing them at 2.5 times the rate for the listed secondary market is counter intuitive and creates an active disincentive for greater rupee capital participation," Siddarth Pai, Founding Partner at 3one4 Capital and Co-Chair Regulatory Affairs Committee at Indian Private Equity and Venture Capital Association (IVCA) said.

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