PE, VCS seek tax breaks to tide over Covid crisis

Private equity (PE) players are seeking a one-time tax holiday from the government amid a steep decline in investment and fundraising activities since the outbreak of Covid-19.

Industry body Indian Private Equity & Venture Capital Association (IVCA) has written to the government, asking for a one-time exemption from long-term capital gains (LTCG) tax on private equity investment for two years. This shall apply only to primary investments, for securities that are held for at least 36 months, and valid for investments made within two years from the date of grant of the exemption. Domestic funds and broad-based global funds should be eligible for this relief, it demanded.

For unlisted companies, gains are treated as accrued over a long term if shares are held for more than 24 months, and taxed at 10 per cent for nonresident taxpayers. The tax was introduced in the Finance Act, 2016, and applied retrospectively from 2012-13.

Experts believe a tax exemption can especially sweeten the deal for global funds looking for higher riskadjusted returns and strengthen their case for investing in India. These funds have cornered the lion's share of PE and VC investments in the country over the past few years, and might be sitting on an estimated dry powder of $45-60 billion.

“Several companies have been seriously impacted by the pandemic and need capital to survive. About 60-70 per cent of FDI comes through private equities — most of which are overseas money. This needs to be tapped in the current moment of crisis,” said Ashley Menezes, partner & COO, Chryscapital Advisors and chair, IVCA Regulatory Affairs Committee.

PE investment is typically done with a five-to-seven-year horizon and is long-term, sticky capital. Global fund activity has been led by control transactions or buyouts, as well as growth in large, complex deals of over $100 million.

Menezes believes taxes collected in the long term will easily compensate for taxes foregone because of the one-time exemption. “Additional capital will create jobs and spur business growth which, in turn, will boost tax collection in the long term,” Menezes said.