Government may undo LTCG on start-up investments 

NEW DELHI: The Finance Ministry may accept a Parliamentary committee’s recommendation on removing Long Term Capital Gains (LTCG) tax on investments by funds in unlisted shares of start-ups.

The move is an effort to incentivise domestic angel and venture capital funds to invest more in new Indian firms and broaden their funding sources. 

Top revenue officials said, “the recommendation of the standing committee has taken on an urgency now as the Delhi bench of the Income Tax Appellate Tribunal has recently has held that indirect transfer of Indian assets through a structured deal abroad will not attract capital gain.” 

The Standing Committee on Finance had last month suggested that ILTCG on sale of unlisted securities issued by Indian start-ups should be exempt for at least two years, to give them parity with listed securities and to incentivise Indian funds to invest in start-ups.

Most foreign angel, venture and other funds have been investing in Indian start-ups through deals registered in low tax countries such as Singapore. 

However, of late, Indian tax authorities have been demanding LTCG for these deals, leading to a spate of litigation.

However, the Delhi bench of the ITAT’s ruling in a case concerning Augustus Capital Pte Ltd, which had routed its investments and sale of equity as an incubator in Indian companies through Singapore, has said that LTCG could not be imposed on the firm since Explanation 6 and 7 of Section 9 (1)(i) of the Income Tax Act allow small shareholders, such as VC funds who do not transfer management control and deal in less than 5 per cent of the equity of a firm, to be out of the ambit of the section for taxation purposes. 

“Under such circumstances it makes no sense to say that Indian venture funds should pay 20 per cent LTCG while foreign funds should not because they structure their deals abroad,” pointed out revenue department officials.

“We are consequently thinking of doing away with LTCG (in these cases,” they added.

Tribunal judgement may result policy tweaks

While Indian tax authorities have been demanding LTCG on start-up funding through deals registered in low-tax countries, the Income Tax tribunal has ruled that these agreements fall outside the ambit of taxation