Venture capital industry looks for tax sops, reforms

The venture capital industry has demanded tax concessions for specific sectors and better clarity on some specific policies governing the VC industry in the upcoming Budget to help boost "innovative" firms in India.

"As we approach the Union Budget for 2010, we urge the ministry to clarify or improvise some specific policies governing the VC industry," Reliance Venture Asset Management CEO Harshal Shah said.

Shah further said that the current Foreign Venture Capital Investor guideline is unclear about investing in sectors beyond a few shortlisted ones namely biotechnology, nanotechnology, IT hardware and software, research and development for new chemical entities, seed research, dairy, poultry, bio-fuels and large hotel-cum-convention centres.

"It is time that the ministry streamlines these guidelines and triggers more investment by introducing encouraging tax implications beyond the above stated sectors," Shah added.

Meanwhile, Rohit Madan, Research Director, VCCEdge -- the financial research platform of VCCircle.Com -- believes that "the 2010 budget should lay the foundation for the introduction of the Direct Tax Code in April 2011."

Many clarifications are awaited on the treatment of Venture Capital Funds (VCF) as full tax pass-through vehicles. The Budget could make things easier by restoring the pre-2007 pass-through benefits to VCF’s for all sectors, Madan added.

According to SMC Capitals Equity Head Jagannadham Thunuguntla, some tax concessions for specific sectors can help the PE/VC industry. Besides, tax incentives and easy credit can encourage the young entrepreneurship and innovative concepts.

"The government should encourage innovative ideas in the country, which enables wealth creation, employment generation in the country," he added.

Reliance Venture Asset Management's Shah further said, "we are hopeful that there will be better clarity on conversion of a trust (which VC funds are typically established as) into a Limited Liability Partnership format as the current ambiguity may dissuade foreign investment for their misconstrued inability to enjoy tax treaty benefits."

Besides, the government should also increase the limit of overseas investment beyond the current 10 per cent of the fund size so that domestic funds can capitalise on global investing opportunities.

Additionally, the current provision of Indian companies investing in global companies beyond 400 per cent of the company's net worth, only with approvals, and up to an annual nationwide cap of $500 million are limiting by nature and should also be revised, Shah said.