Panel proposes tax incentives for startups

NEW DELHI: A parliamentary panel has recommended abolishing tax on long-term capital gains (LTCG) for investments in startups that are made through collective investment vehicles (CIVs) such as angel funds, alternate investment funds (AIFs) and limited liability partnerships (LLPs) engaged in the business of making investments.

“At a minimum, this should be done for at least the next two years to encourage investments during the pandemic period,” the panel said in its report, ‘Financing the Startup Ecosystem’. Jayant Sinha, the chairperson of the standing committee on finance, submitted the report to the Speaker last week. After the two-year period, the Securities Transaction Tax (STT) could be applied to CIVs to maintain revenue neutrality. “Investments by CIVs are transparently done and have to be done at fair market value. Thus it is easy to calculate the STT associated with these investments. This can be done in lieu of imposing LTCG on these CIVs and to make the taxation system fairer, less cumbersome, and transparent,” it said. “This will also ensure that investments in unlisted securities are on par with investments in listed securities,” it added.

Smita Goel, partner at law firm Algo Legal said, LTCG was abolished and STT was introduced in FY 2005. LTCG was re-introduced on listed equity shares and equity mutual fund units in FY 2019. This resulted in double taxation. “Abolition of LTCG tax will remove this double taxation and enable investors to choose investments based on risk and return instead of being driven by tax considerations. The loss of revenue from abolition of LTCG will be minuscule compared to the benefits generated as it will incentivise taxpayers to kick-start investment and also create jobs,” she said.