Abolish LTCG on start-up investments: Panel

A Parliamentary panel has “strongly recommended” abolition of long-term capital gains (LTCG) tax for investment in start-ups, besides other tax incentives, to drive a sharp postpandemic revival. This should apply to investments made through collective investment vehicles such as angel funds, alternate investment funds and investment LLPS, it said.

The Parliamentary Standing Committee on Finance, headed by former minister of state for finance Jayant Sinha, said a strong start-up ecosystem can propel investment, jobs, and demand creation, and for that, substantial growth capital is required. It also pitched for self-reliance in capital funding of unicorns to cut dependence on funding from China and US.

The committee also suggested that companies and LLPS should be allowed to invest in start-ups without being classified as non-banking financial companies by the Reserve Bank of India (RBI) to expand capital sources for start-ups.

“The Committee would like to strongly recommend that tax on LTCG be abolished for all investments in start-up firms (as designated by DPIIT) which are made through collective investment vehicles (CIVS) such as angel funds, AIFS, and investment LLPS,” said the report titled Financing the startup ecosystem.” This was submitted to the Lok Sabha Speaker last week.

At a minimum, this should be done for at least the next two years to encourage investments during the pandemic period. After

The committee also suggested that firms and LLPS should be allowed to invest in startups without being classified as NBFCS by the RBI to expand capital sources for start-ups

this two-year period, the Securities Transaction Tax (STT) may be applied to CIVS to maintain revenue neutrality. Since, investments by CIVS are transparent and at fair market value, it is easy to calculate STT associated with these investments. Thus, it can be done in lieu of imposing LTCG on these CIVS, it noted.

It also recommended that the exemption for income on investments made before March 31, 2024, subject to the investment being held for a period of at least 36 months as incentivised in the Finance Act, 2020, should be provided to long-term capital invested across all sectors.