A tax that the country should axe right away2 min read . Updated: 16 Sep 2020, 09:54 PM IST
Relieving investments in start-ups of our tax on long-term capital gains, as proposed by a parliamentary panel, would help them attract funds. Let’s relieve equity portfolios of it, too
As economic forecasters cast a darker shade of gloom over our growth prospects this fiscal year, we need a surge of investment in businesses to counter a covid-led crisis and create jobs. Thankfully, there is plenty of capital around on the lookout for big returns. India needs to make the most of such money. Towards this end, a parliamentary panel headed by Lok Sabha member Jayant Sinha has proposed the abolition of long-term capital gains (LTCG) tax on investments in start-ups made by collective investment vehicles, such as angel funds, alternative investment funds and limited liability partnerships. In a report tabled in Parliament on Tuesday, the committee sought the suspension of that tax for “at least the next two years". This basic proposal should be adopted forthwith, as our start-up ecosystem needs a spur, though not just for a limited time frame, but for good. It should be applicable to all investors, not just a chosen few. New business ventures have a high rate of mortality, and, in general, big risk-takers deserve big rewards. However, there are many low risk-takers who bear that burden as well. Let’s relieve them of LTCG too.
It is well known that a country’s entrepreneurial verve often depends on its tax policy. India’s grisly framework has long been criticized for perverse incentives that result in a variety of market distortions. From wealthy individuals to investment firms, many domestic investors have been wary of funnelling funds into start-ups because of uncertainty over cashing out with rewards that justify the risks borne. This has squeezed the access our entrepreneurs have had to local seed finance. Consider this. India’s LTCG tax on the sale of listed shares—levied if sold after a single year of purchase—is 10% on the gains made, while the same on unlisted stock is 20%, and that too, with “long term" defined as at least two years. Then there is a surcharge of 25-37% to be paid over and above that tax on unlisted shares, a charge that foreign investors need not pay. Is it any surprise that some 80% of our start-up money, as the panel’s report says, comes from abroad through venture capital and private equity funds? We should have the same rules for all classes of investors. Relieving them of LTCG worries may also offer another major benefit. It could crush an incentive for striking overseas deals that involve the transfer of stakes in equity-holding vehicles off our local tax radar. This would allow clearer patterns of ownership to emerge.
Some of the panel’s other ideas seem less doable. It wants pension funds and insurers, for example, to invest in private equity funds that can then fund start-ups. Done poorly, this could spell risk-return and asset-liability mismatches. Meanwhile, start-ups are grappling with a regulatory initiative to see that public share offers—the chief way for early-stage investors to cash out—made abroad are followed by local public issues, with all the extra listing criteria of Indian bourses needing to be met. Dual listing could deter start-up funding if it becomes harder for such firms to go public. Sure, the abolition of LTCG tax will help. But the Centre should also rid listed equities of this levy on gains of over ₹1 lakh. With bank deposits currently paying less than inflation, liquid equity portfolios are all that millions of relatively risk-averse retirees and elderly folk (among others) have to rely on for their rising expenses. Surely, they deserve a break too.