Start-ups cheer proposal to remove LTCG tax

The recommendation to abolish long-term capital gains (LTCG) tax for investments in start-ups for two years is expected to result in tangible benefits for the community.

The move will establish a level-playing field for domestic investments in start-ups compared to foreign-based sources. It will also encourage domestic financial institutions to see start-ups as an alternative asset class that has been heavily dependent on foreign capital till now, experts said.

“It is a great first step as domestic money is not flowing into the (start-up) ecosystem like other nations. A lot of foreign capital is taking a larger slice of the pie. The tax incentives will go a long way in kick- starting the domestic contribution as most PE and VC funds have also raised money outside India. This will unlock domestic capital from insurance and financial institutions that don’t usually invest in startups,” said V Balakrishnan, partner and chairman at Exfinity Venture Partners.

Of the $14 billion raised by start-ups from VCS in 2019, only around $1 billion came from Indian sources, said experts.

“These reforms would open the floodgates of domestic capital going into start-ups like never before as long as the eligibility criteria of the tax benefits are not too narrow,” said Kunal Bahl, CEO and cofounder of Snapdeal.

“The LTCG tax in India is higher for private and unlisted securities, that is at 20 per cent, when compared to publiclylisted securities (10 per cent). This policy is short-sighted because start-ups directly create jobs and tech advancements, including IP in India,” said Kushal Bhagia, CEO at Firstcheque.vc.

“Fully loaded, Indian investors into start-ups pay 2.54 times the rate paid by their foreign counterparts. This is the reason for the emaciated participation of Indian investors in domestic start-ups,” said Siddarth Pai, founding partner at 3one4 Capital.

The tax incentive will also dissuade a lot of India-focussed start-ups from registering their headquarters in cities such as Singapore or Delaware instead of India as encouraged by the foreign-based PE or VC funds that have backed them.

“Tax is a big motivator for foreign funds to encourage such a move (of setting up foreign-registered holding companies) as it fetches them a better internal rate of return (IRR). Now, that argument doesn’t hold as much water,” he said.

Experts said the recommendations are likely to be adopted as long-term benefits will outweigh the quantum of revenue impact that is anyway projected to be minimal.

This may result in investments from domestic banks and insurance firms