Parliamentary Panel for removal of LTCG on investments into startups

The Indian startup ecosystem can look forward towards a more conducive funding climate as a Parliamentary Panel on Finance is in favour for the removal of Long Term Capital Gains (LTCG) tax on investments made into startups.

The Standing Committee on Finance, chaired by former Union Minister of State for Finance Jayant Sinha, has strongly recommended the abolishing of this tax on all investment vehicles into startups.

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According to the committee, investments made by angel funds, alternative investment funds, investment LLPs should be exempted from taxation of LTCG for at least the next two years to boost investments during the COVID-19 pandemic.

“After this two year period, the Securities Transaction Tax (STT) may be applied to collective investment vehicles (CIVs) so that revenue neutrality is maintained,” the report said.

The committee noted that businesses are stressed for liquidity and valuations of businesses have softened due to the pandemic. It also said that the pricing guidelines prescribed under the various laws and regulations by SEBI, Income Tax Act, Companies Act, and FEMA should be made more consistent to provide a certain, coherent and simple framework for facilitating large-scale investments in India.

At present, LTCG earned by foreign investors in private companies attracts taxation at concessional rate of 10 percent, in comparison to the domestic VC/PE investments being taxed at 20 percent (for LTCG) with an enhanced surcharge of 37 percent.

The panel also proposed that the sectors in which Foreign Venture Capital Investor (FVCIs) are allowed to invest should be expanded to include all sectors where Foreign Direct Investment (FDI) is permitted, as this route provides a flexible investment framework and hence will be able to attract significant capital in the economy.

The startup ecosystem has long been raised this demand for the removal of LTCG as there has been a disparity of this taxation between foreign and domestic investors.