Treat private equity on par with public equity

Sashi Reddi

When the government decides on a tax policy, it is signaling to the world how it wants investors to allocate their capital. So if the tax on real estate gains is zero, it means that the government wants people to buy real estate. If the tax on real estate gains is high, then it signals that the government does not want people to do real estate transactions.

Tax policy goes against “Startup India” initiative: What is the government signaling by having a different tax between public equity and private equity? Earlier long term capital gains on public equity were zero, but now it is 10 percent. Long term capital gains tax on private equity is 20 percent. So it would seem the government still wants people to invest their capital more in the public markets rather than in startups, or unlisted shares. However, any common sense policy review will tell you that it is the startup ecosystem that will drive India’s growth over the next 20 years.

When you signal that you want people to invest in public equity rather than private equity, the government is directly contradicting its stated goals of creating a “Startup India”. It is not enough to encourage people to start companies, if you are going to encourage investors to not fund them.

Confusing tax policy for private equity but not public equity: The infamous “angel tax” where investments in a startup could be taxed as income in the hands of the company, has created unnecessary confusion for investors in private equity. If we had similar confusion in the public markets, we can be assured that trading will come to a halt. Uncertainty in tax law will doom the startup ecosystem.

Make laws to help the 99 percent honest people rather than to catch the 1 percent crooks: All Indian laws seem to be designed with an intention to make life difficult for the 1 percent of people who are crooks. However, invariably these laws end up making life horrible for the honest 99 percent. The “angel tax” is a great example of that. The rules around having a startup be “certified” as a genuine startup is another example—completely pointless bureaucratic interference in the startup ecosystem.

Do not give meaningless tax breaks: The government stating that they would not tax the profits of a startup for the first few years is an example of mindless tax policy. Startups rarely make money in the first few years so that is a great example of mindless policy. In fact, not only does it actually not help startups, it makes things worse by creating so much confusion and opening the doors for tax authorities to harass startups. Good intent perhaps but disastrous from an impact standpoint.

Government should operate at the “macro” level rather than “micro” level: It would be greatly beneficial if the government made policy at the macro level—for example, tax policy will be the same for public equity and private equity. It should not operate at the micro level—for example, deciding what is considered a startup. This one over-riding approach to tax and economic policy will provide the maximum impact and reduce the role of bureaucrats at the implementation level.

In spite of all my concerns listed above, India is definitely on a path to great transformation in the next 20 years. Laws are getting clarified, the government is clear in its intent to improve the ease of doing business and attracting capital, and there is a palpable energy in the startup ecosystem. Progress unfortunately is incremental, but hopefully the direction is unchangeable.