PE, VCs seek one-time tax holiday to tide over Covid-induced crisis

Want no long-term capital gains tax for two years on investments held for 36 months; EY India sees 45-60% contraction in Indian PE/VC investment activity this year from record highs of 2019

Private equity (PE) players are seeking a one-time tax holiday from the government amid a steep decline in investment and fundraising activities since the outbreak of Covid-19.

Industry body Indian Private Equity & Venture Capital Association (IVCA) has written to the government, asking for a one-time exemption from long-term capital gains (LTCG) tax on private equity investment for two years. 

This shall apply only to primary investments, for securities that are held for at least 36 months, and valid for investments made within two years from the date of grant of the exemption. Domestic funds and broad-based global funds should be eligible for this relief, it demanded.

For unlisted companies, gains are treated as accrued over a long term if shares are held for more than 24 months, and taxed at 10 per cent for non-resident taxpayers. The tax was introduced in the Finance Act, 2016, and applied retrospectively from 2012-13.

Experts believe a tax exemption can especially sweeten the deal for global funds looking for higher risk-adjusted returns and strengthen their case for investing in India. These funds have cornered the lion's share of PE and VC investments in the country over the past few years, and might be sitting on an estimated dry powder of $45-60 billion.

 

 

“Several companies have been seriously impacted by the pandemic and need capital to survive. About 60-70 per cent of FDI comes through private equities — most of which are overseas money. This needs to be tapped in the current moment of crisis,” said Ashley Menezes, partner & COO, ChrysCapital Advisors and chair, IVCA Regulatory Affairs Committee.

PE investment is typically done with a five-to-seven-year horizon and is long-term, sticky capital. Global fund activity has been led by control transactions or buyouts, as well as growth in large, complex deals of over $100 million.

Menezes believes taxes collected in the long term will easily compensate for taxes foregone because of the one-time exemption. “Additional capital will create jobs and spur business growth which, in turn, will boost tax collection in the long term,” Menezes said. 

“The government has already extended tax concessions to pension and sovereign wealth funds investing directly in India. Now is the time to consider extending these concessions to all investors,” said Vivek Soni, partner and national leader-private equity services, EY India.

The Budget this year had exempted income earned by sovereign wealth funds and pension funds arising from investments in specified infrastructure activities made between April 1, 2020 and March 31, 2024 and held for three years. These funds make up less than 22 per cent of the total PE/VC capital invested in India over the last three and a half years.

The Covid-19 pandemic has hit PE/VC investment activity hard, both globally and in India, as investors sit on the sidelines amid the prevailing uncertainty. EY India estimates 45-60 per cent contraction in Indian PE/VC investment activity this year, from the record highs seen in 2019.