Finance Minister Arun Jaitley may propose to create a favourable tax environment for venture capitalists (VCs), private equity (PE) firms, angel investors and hedge funds as part of the broad strategy to ease fund flow to start-ups and small businesses.
The measures, likely to be announced in the budget for 2017-18, will draw upon the recommendations that a Securities and Exchange Board of India (Sebi) panel on Alternative Investment Funds (AIFs) headed by Infosys Founder NR Narayana Murthy had made recently.
Among the measures examined include giving tax pass-through status to hedge funds or Category III AIFs. A ‘pass-through’ status means that the income generated would be taxed in the hands of the investor, as opposed to taxing the fund itself. AIFs, or funds collected pooled from high net-worth individuals are invested primarily in unlisted securities and start-ups to promote entrepreneurship.
Venture capital and private equity funds have pumped in billions of dollars into India’s fledgling e-commerce industry driven by an optimism of a fast-expanding mobile Internet universe.
A study by industry group National Association of Software and Service Companies (Nasscom) and Zinnov Consulting has found out that India has the third-highest number of start-ups in the world (an estimated 4,200-4,400), behind only the US and the UK. While the aggregate number of start-ups is figure that one can expect to gallop over the next few years, the study has thrown up interesting insights.
Three to four start-ups are born every day and an estimated $5 billion worth of funding has flown into Indian start-ups this year so far. AIFs have invested more than $103 billion in Indian companies between 2001 and 2015. These investments were made in over 3,100 companies across 12 major sectors, the Narayana Murthy-panel noted in its report. In 2012, markets regulator the Securities Exchange Board of India (SEBI) placed AIFs under three categories.
Funds that have a positive spillover on the economy such as infrastructure funds and social venture funds were placed as Category I AIFs. Private equity, venture capital and debt funds fall into Category II AIFs, while Category III AIFs include hedge funds. In February 2015, Jaitley in his budget speech announced tax pass through status for Category I and II AIFs.
The committee had recommended several changes in taxation policy for AIFs including introduction of securities transaction tax (STT) for private equity and venture capital investments as it has worked effectively for several years in case of foreign portfolio investors and tweaking of safe harbour norms. The panel has also suggested exemption from service tax on services for raising funds from overseas investors.
Source: Money Control
