NEW DELHI: The Parliamentary Standing Committee on Finance has strongly recommended that tax on long term capital gains be abolished for all investments in startups which are made through collective investment vehicles (CIVs) such as angel funds, alternative investment funds AIFs), and investment LLPs.
The panel headed by BJP MP and former junior finance minister Jayant Sinha said this should be done for at least the next two years to encourage investments during the pandemic period.
It said that after this two year period, the Securities Transaction Tax (STT) may be applied to CIVs so that revenue neutrality is maintained. Investments by CIVs are transparently done and have to be done at fair market value. “Thus it is easy to calculate the STT associated with these investments. This can be done in lieu of imposing LTCG on these CIVs and to make the taxation system fairer, less cumbersome, and transparent. This will also ensure that investments in unlisted securities are on par with investments in listed securities,” the panel said in its report which was presented to Parliament.
The panel said that substantial growth capital is required to scale up startups in India and for unicorns in particular. Unicorns initially require seed capital of hundreds of crores, and then as they grow they need thousands of crores to build global scale businesses. It said capital going into India’s unicorns comes mainly from foreign sources such as the US and China. “The committee believes that this dependence be reduced so that India becomes self-reliant by having several large domestic growth funds powered by domestic capital to support India’s unicorns,” according to the report.
The panel was of the opinion that the Small Industries Development Bank of India (SIDBI) Fund-of-Funds vehicle should be expanded and fully operationalised/utilised to play an anchor investment role. It said that SIDBI should play a pivotal role in disbursing more funds that would help startups and unicorns to scale up significantly. The panel said that these funds be managed by top quality professional management teams who specialise in different sectors such as healthcare, e-commerce, agritech, cyber security among others.
The committee was also of the view that the Securities and Exchange Board of India (SEBI) should allow venture capital funds to invest in Non-Banking Financial Companies (NBFCs) which would help enhance their capital base. The panel said that successful Initial Public Offerings (IPOs) of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs) have already shown that asset portfolios can be packaged together to attract specific investor type and thus would like to recommend that NBFCs also be allowed to list on stock exchanges to be able to draw in a larger investment pool.