Parliamentary panel bats for abolishing LTCG on startup investments

Topics LTCG | startups in India | LTCG tax

The committee also suggested that companies and LLPs be allowed to invest in startups without being classified as NBFCs by the Reserve Bank of India
A Parliamentary panel has “strongly recommended” abo­lition of long-term capital gains (LTCG) tax for investment in start-ups, besides other tax inc­entives, to drive a sharp post-pandemic revival. This should apply to investments made through collective investment vehicles such as angel funds, alternate investment funds and investment LLPs, it said.

The Parliamentary Standi­ng Committee on Finance, headed by former minister of state for finance Jayant Sinha, said a strong start-up ecosystem can propel investment, jobs, and demand creation, and for that, substantial growth capital is required. It also pitched for self-reliance in capital funding of unicorns to cut dependence on funding from China and US.

The committee also suggested that companies and LLPs should be allowed to invest in start-ups without being classified as non-banking financial companies by the Reserve Bank of India (RBI) to expand capital sources for start-ups.

“The Committee would like to strongly recommend that tax on LTCG be abolished for all investments in start-up firms (as designated by DPIIT) which are made through collective investment vehicles (CIVs) such as angel funds, AIFs, and investment LLPs,” said the report titled Financing the startup ecosystem.” This was submitted to the Lok Sabha Speaker last week.
At a minimum, this should be done for at least the next two years to encourage investments during the pandemic period. After this two-year period, the Securities Tra­nsaction Tax (STT) may be ap­plied to CIVs to maintain revenue neutrality. Since, inve­stments by CIVs are transparent and at fair market value, it is easy to calculate STT associated with these investments. Thus, it can be done in lieu of imposing LTCG on these CIVs, it noted.

It also recommended that the exemption for income on investments made before March 31, 2024, subject to the investment being held for a period of at least 36 months as incentivised in the Finance Act, 2020, should be provided to long-term capital invested across all sectors.

“With adequate risk capital backing them, start-ups can provide innovative new services which can have a multiplier effect on the economy,” said the panel.

It pressed for adopting a more pragmatic approach on applying fair market value principles in transactions between independent parties as businesses are stressed for liquidity in the current environment and valuations of businesses have softened. The pricing guidelines prescribed under the various laws should be made more consistent to provide a simple framework for facilitating large-scale investments, it said.
The panel also batted for self-reliance in capital funding for unicorns, which now mainly comes from US and China. It said that the Small Industries Development Bank of India Fund-of-Funds vehicle should be expanded and fully operationalised or utilised to play an anchor investment role. The term unicorn is used to describe a privately held start-up company with a value of over $1 billion.

“Unicorns initially require seed capital of hundreds of crores, and then as they grow they need thousands of crores to build global scale businesses. The Committee note in this regard thatcapital going into India’s unicorns comes mainly from foreign sources such as US and China. The Committee believe that this dependence be reduced so thatIndia becomes self-reliant by having several large domestic growth Funds powered by domestic capital to support India’s unicorns,” it said.



Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel