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A parliamentary panel has proposed tax incentives for startups, including removal of long-term capital gains (LTCG) tax, on investments in such companies on the grounds that a strong startup ecosystem can propel investments, jobs and demand creation.

The parliamentary standing committee on finance led by Jayant Sinha said in a report tabled in Parliament that it “would like to strongly recommend that tax on LTCG be abolished for all investments in startup 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 panel said the abolition of LTCG tax should be for at least the next two years to encourage investments.

Post this period, securities transaction tax (STT) may be applied so that revenue neutrality is maintained, the panel said. STT is now levied only on listed securities and the panel believes 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 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 investments in unlisted securities are on par with investments in listed securities," the panel noted.

“The committee 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.

An industry official said the panel has given voice to a long-standing 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-productive 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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