Budget 2023 a dampener for investor ecosystem

The budget ignored demands from the Indian PE and venture capital ecosystem on Long Term Capital Gains Tax and regulation of AIFs.

Budget 2023 a dampener for investor ecosystem

Thursday February 02, 2023,

3 min Read

Union Budget 2023 was welcomed by technology startups for key changes including the data governance policy, focus on AI (artificial intelligence), a fillip to agritech, and ease of doing business measures. 

The budget also extended the date of incorporation for startups for tax relief and offered the benefit of carrying forward losses on change of shareholding of eligible startups from seven years of incorporation to ten years.

However, early-stage startups were in for a shock as Angel Tax was extended to investments from non-residents, effective April 1, 2024. The provisions under Section 56(2) (viib) of the Income Tax Act have been amended to ensure that exemptions to Angel Tax are offered only to SEBI-registered Alternative Investment Funds (AIFs). 

Angel Tax

“Previously it only applied to investments from residents. Foreign capital is the largest source of funding for Indian startups and this measure will push many investors to turn hesitant in funding Indian startups. It will also push Indian entrepreneurs to move overseas,” said Siddharth Pai, Co-founder of 3one4 Capital and Co-Chair, Regulatory Affairs Committee at the industry body for private equity and venture capital, IVCA. 

This was seconded by Pankaj Makkar, Managing Director at Bertelsmann India Investments. “While the intent is appreciated, the rules as prescribed could unintentionally impact genuine cases such as convertible rounds,” he said in a statement.

Apart from the amendment to Angel Tax, the budget was a missed opportunity for the government to bring in much-needed taxation reforms for private sector investors, was the popular opinion. 

No relief on LTCG

“Yes, there was a lot of expectation from the VC/PE investor community to see rationalisation in capital gains tax to boost capital flows to a space that attracted over $100 billion in investments over the last six years. It is a disappointment to have this request denied this year as well. I strongly advocate for a tax regime to attract foreign capital directly into Indian startups,” said Anirudh A Damani, Managing Partner at Artha Venture Fund. 

Siddharth Pai of IVCA added that key asks tabled by the Expert Committee on PE/VC investments including parity of taxation between listed and unlisted shares, recognition of AIF (Alternative Investment Funds) operations in Indian Tax Law (especially GST), allowing set-off of fund expenses against income and allowing institutional rupee capital to come into Indian startups and AIFs were missing from the budget. 

“Another missed segment was the gradual increase in the minimum ticket sizes for AIFs. This would have helped create a more conducive environment for domestic first time investors,” said Rajat Khurana, Senior Vice President–Private Markets, Lighthouse Canton India in a statement given to YourStory.

Incubator and accelerators look for further support 

While the announcement of the Agriculture Accelerator Fund by the Finance Minister was welcomed, the incubator and accelerator ecosystem, at large, was left wanting for targeted announcements extending further support. 

“The backbone for innovation in the country sits with research labs and incubators; we were looking forward to some support in fostering sustained growth and scale for the entrepreneurship and innovation ecosystem in the country,” said Anand Sri Ganesh, COO, IIM Bangalore NSRCEL.

“The budget could have included measures such as promoting entrepreneurship through fund of funds and seed capital for R&D, IP filing, expanding domestic LP base and capital pools and regulating crowdfunding and angel funding platforms” said Mahankali Srinivas Rao, CEO of T-Hub. He added that incentivising investors to participate in MSME listings and encouraging domestic institutional investors to participate in the market. 

Edited by Affirunisa Kankudti