Private Equity & Venture Capital Favour LTGC Tax

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 ArunJaitley 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.

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 ArunJaitley.

Equity market experts said the taxation parity has the potential to incentivize more allocation towards the PE and VC asset classes.

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.