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Parliamentary Panel Suggests Abolishing LTCG Tax On Startup Investments

LTCG earned by foreign investors in private firms attracts a tax of 10%, while local investments are taxed at 20% plus surcharge.

A statue of B.R. Ambedkar, the architect of India’s constitution, stands outside of Parliament House in New Delhi, India. (Photographer: T. Narayan/Bloomberg)
A statue of B.R. Ambedkar, the architect of India’s constitution, stands outside of Parliament House in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

A parliamentary panel has suggested abolishing long-term capital gains tax on investments made in startups to help them raise funds during the pandemic.

The Parliamentary Standing Committee on Finance, chaired by BJP lawmaker Jayant Sinha, suggested investments made by angel funds and alternate investment funds into startups—registered by Department for Promotion of Industry and Internal Trade—be exempt from LTCG for at least two years, according to a report on the Lok Sabha website. This would help entrepreneurs raise capital at a time the Covid-19 pandemic has dampened investment sentiment, it said.

LTCG made by foreign investors in private companies attracts a tax of 10%, while domestic investments are taxed at 20% plus surcharge.

After the two-year period, the securities transaction tax can be imposed on angel funds and AIFs to maintain revenue neutrality for the government, the panel said in its report titled 'Financing The Start-Up Ecosystem'. STT is imposed at 0.1% of the value of listed shares traded on exchanges.

The ongoing Covid-19 pandemic has drastically impacted the global economy with demand contraction, disrupted supply chains and stalling of investments, the panel said. India’s ability to grow and show resilience post the pandemic will be dependent on building a strong startup ecosystem that can propel investment, jobs, and demand creation, the report said.

The panel also suggested that Pension Fund Regulatory and Development Authority and National Pension Scheme can start allocating a small percentage of their corpus into AIFs to invest in startups.

The suggestion comes despite reservations flagged by Finance Ministry officials that the “pension sector is in a nascent stage, and exposing the funds of subscribers to too much risk at this stage is not prudent,” the report said. However, it will be reviewed in calibrated manner considering the security and risk of investment of fund meant for old-age pension at an appropriate time, the finance ministry official told the panel, according to its report.

It has also suggested that large Indian financial institutions should be encouraged to channelise a portion of their investible surplus into domestic funds which would bring in much-needed additional domestic capital for startup investments.

Funding ‘Unicorns’

The panel said that unicorns—startups with over $1 billion valuation—need to be scaled up, and the source for their capital-raising should be Indian as against current source of U.S. and Chinese funds.

India has about 50 ‘unicorns’ that are now worth more than $500 billion collectively, and are leaders in the IT services, telecom, financial services, airline, e-commerce, and retailing industries, according to the report.

More than 80% of startup financing is through foreign capital, largely channelled through the venture capital and private equity industry, according to industry estimates shared in the report. “This dependence be reduced so that India becomes self-reliant by having several large domestic growth funds powered by domestic capital to support India’s unicorns.”

The Small Industries Development Bank of India should play a pivotal role in disbursing more funds that would help startups and ‘unicorns’ to scale up significantly, enabling the nation to become more self-reliant and be in a better position to control its economic destiny, it said.