Budget 2022-23: Startup founders, investors to benefit from 15% cap on tax surcharge

Mumbai/Bengaluru: Venture capital investors and startup founders are likely to benefit from a tax tweak announced in Budget 2022-23. The surcharge on long-term capital gains (LTCG) tax has been capped at 15% for all listed and unlisted companies, Finance Minister Nirmala Sitharaman said.

This addresses a long-standing demand of new-age companies, which wanted share sales of unlisted firms to be taxed at par with those of listed ones. To be sure, only the surcharge levied on unlisted share sales has been reduced – from 37.5% to 15%. The tax rate remains unchanged at 20%.

Industry executives told ET this would not only cover employee stock option sales but all transactions by privately funded startups, reducing their tax burden by around 16%.

Siddarth Pai, cofounder at early-stage venture capital from 3one4 Capital, said, “Overall LTCG on unlisted securities is now 23.92% as opposed to 28.5% previously. This will apply to founders, employee stock option holders and domestic investors. This is a 16% reduction in the tax rate and brings parity on taxation for listed and unlisted securities. Unlisted securities pay long-term capital gains tax at 2.4 times the rate of their listed counterparts. Parity was long-expected in this budget. It also put a cap on the surcharge, which is a positive development.”

Separately, the government also extended the tax incentives it offers to new startups for the first three years of their incorporation to four years, after taking the pandemic-induced fiscal pain into account, the finance minister said in her speech.

Sitharaman also said an expert committee would be set up to examine and suggest appropriate measures to boost venture capital and private equity investments in startups. “Venture capital and private equity invested more than Rs 5.5 lakh crore last year, facilitating one of the largest startup ecosystems. Scaling this investment requires a holistic examination of regulatory and other frictions,” she said, explaining the need to set up the expert committee.