Budget 2017: PE, VC funds seek tax parity between public, private markets

The present tax provisions incentivise public market investments more than private investments

Private equity and venture capital investors want the coming Union Budget to address their concerns over the tax provisions incentivising the public market investments over private investments.

 
Alternate Investment Funds (AIFs) have invested around $130 billion since 2001 in India and can provide a strong long-term equity and short-term capital requirement for more than eight per cent economic growth, say industry players.
 
They say that people are incentivised to invest in public market. For instance, capital gains tax on investments in publicly listed companies is levied at zero per cent if held for over a year, and at 15 per cent if held for less than a year. By comparison, an investment for over three years in unlisted companies or start-ups attracts 20 per cent tax, and those of less than three years fall under short-term capital gains, taxed at 33 per cent.
 
“The tax structure is creating a bias and disincentivising long-term development of the country by putting money into the public market. That is a concern as far as the private investors are concerned,” said Gopal Srinivasan, chairman and managing director of TVS Capital Funds. He added that the government was engaging with investors and was very open to dialogues and engagement.
 
Another industry representative said the AIFs and angel groups in unlisted companies carried a higher risk and the holdings were liquid, and this had to be taken into account when fixing the tax.
 
“The industry is hoping that either the public market tax will be enhanced, or the private equity tax will be brought down from 20 to 10 per cent for long-term. If you take an off-market transaction for a listed share, it is 10 per cent flat, 20 per cent indexed. But for private equity, it is 20 per cent indexed," said Srinivasan.
 
Indian Venture Capital Association (IVCA) has said that there is a need for certain and consistent tax regime, including providing GST abatement, proportionate to foreign capital in AIF and to apply GST band of 12 per cent for services to these funds.
 
They also requested that the finance ministry consider amending safe harbour provisions in the Income-Tax Act to facilitate onshoring of fund managers, since most of the fund managers of offshore funds manage their investments from abroad rather than from India.
 
Thay have also sought that the government bring in smooth regulations for insurers and the Pension Fund Regulatory and Development Authority (PFRDA) invest in AIFs and encourage EPFO to invest three to five per cent in AIFs.
 
Another area of focus is that there is a notification in the unlisted shares that if there is transfer of management and control, the assessing officer can decide the tax rate – whether it is 20 per cent index or 33 per cent. In most VC and PE investments, there is some element of management and control, and any tax officer can take a decision on the taxation. This had created tremendous amount of stress in the system, added Srinivasan.
 
The industry players also said getting money for the VC funds from the government’s fund of funds, of Rs 10,000 crore, was difficult at present, given some structural issues. The industry has also offered solutions to this which could make the procedure smooth and help them to avail of the fund.