PEs breathe easy as FM halves tax on long-term capital gains

Move will help revive a slowing inflow of foreign funds

The finance ministry today decided to halve the tax on long-term capital gains for private equity (PE) investors to 10 per cent to help revive slowing inflow of foreign funds.

The government will also exempt long-term capital gains on the sale of unlisted securities in initial public offerings (IPOs) from tax, the ministry said in a statement. It also decided to delay the introduction of the General Anti-Avoidance Rule (GAAR) to crack down on tax evasion by a year, following concerns among foreign investors.

At present, long-term capital gain arising from the sale of unlisted securities in the case of foreign institutional investors (FIIs) is taxed at the rate of 10 per cent, while other non-resident investors, including PE investors, are taxed at the rate of 20 per cent. PE investors, based out of tax havens such as Mauritius, but who fail to comply with GAAR, were supposed to pay a long-term capital gain tax of 20 per cent while exiting investments through sell-out of shares.

Abhay Pandey, managing director of Sequoia Capital, said, “Investors were waiting for clarity, which caused a slowdown in PE investments. Now, investors got one more year to comply with the new norms.”

PE investors had demanded the tax should be levied on par with FIIs, as PE investments were also long-term. PE investors unable to exit investments through IPO prefer the strategic sale route. However, the government’s earlier plan to levy a 20 per cent tax was likely to hit the sell-out route of exit.

Darius Pandole, partner at New Silk Route Advisors, said, “The move to reduce capital gain tax to 10 per cent has brought consistency and predictability in the tax regulatory framework for PE investors.”

The ministry also decided to have an enabling provision in the Income Tax Act for exemption to a notified class of investors, including Angel investors who invest in start-up companies. Angel investors had raised concerns over the ministry’s plan to tax the excess fair offered to a company by an investor than its market value.

The benefit of tax exemption on long-term capital gains has been extended to the sale of unlisted securities in an IPO. The ministry proposed to levy a 0.2 per cent securities transaction tax on the sale of unlisted securities.