Investors expect tax relief, parity, and clarity on regulations from Budget 2025
The Indian investor community, in its discussions with the Ministry of Finance, has urged for greater parity in the rules applicable to Alternative Investment Funds (AIFs) and foreign investors, in addition to simplifying regulations.
With the funding winter on its last leg, the Indian investor community is betting big on clarity in regulations to start deploying the dry powder they have amassed over the last year. The discussions around the introduction of the Income Tax bill during the Budget session is expected to address the list of demands presented by the Indian venture capital (VC) and private equity (PE) ecosystem.
The industry body representing Indian venture capital, private equity, and other investment vehicles Indian Venture and Alternate Capital Association (IVCA) has reached out to the Ministry of Finance with recommendations based on key reform measures. These include reduction in the duplication and number of regulations, which currently apply to the industry, reducing scope of litigation, and encouraging the general ease of doing business.
Speaking to YourStory, Siddarth Pai, Founding Partner at and Co-Chair of Regulatory Affairs Committee at IVCA, said, “The theme for this year’s budget submission from IVCA has been focused on two themes—parity and clarity. We want parity to be offered to various investor vehicles. We have noticed that regulations treat you differently based on whether you are incorporated as a trust, as an LLP or as a company. There is a multiplicity of regulation which applies to the same business model.”
Pai added that the parity of regulation will bring Indian investment vehicles, Alternative Investment Funds (AIFs) on par with foreign investment funds (FCIs), doing away with artificial differences between the two.
“For example, for FCIs, there is zero ambiguity on income from business and income from capital gains—both are treated as capital gains and taxed accordingly. Whereas for AIFs, it depends on the holding period, category of AIF, etc.”
Tax reforms top the list
Lauding the move to treat shares of privately-listed companies on par with public companies announced in the last budget, Pai added that including AIF operations across regulations will provide an impetus to investments as the proverbial funding winter comes to an end in 2025.
“From the medium term perspective, most AIF operations do not seem to have any reflection across regulations. Category 3 AIFs are not mentioned in either the Income Tax Act or the GST Act, resulting in notices being issued. As investors look to deploy capital with the end of the funding winter, it would help if lack of clarity on regulations do not act as an impediment,” he added.
In a statement, Rashmi Guptey, CFO and General Counsel at venture capital firm , said that GST slab simplification across sectors and technology-enabled tax dispute resolution will enable faster outcomes, freeing up cash flows for the government and businesses overall.
In addition, the demand for simplifying tax slabs for emerging businesses, including quick commerce, gaming, and other industries, will offer these sectors headroom for growth, according to Guptey.
Simplification of ESOP taxation
A demand which continues from last year is the simplification of ESOP taxation. ESOPs, or Employee Stock Ownership Plan, offers employees a share in the company’s value creation over a period of time.
However, ESOPs in India are taxed in two stages—once when the option is exercised to acquire the shares and the second time during the time of actual sale of shares. The difference between the sale value and cost is taxed as capital gains.
“The best way for startups to attract and retain top draw talent to build a high traction and high value company is ESOP. It is imperative that ESOPs bring the value it is intended to—for the company to retain top talent and for talent to build wealth, as the startup grows,” Padmaja Ruparel, Co-founder of Group told YourStory.
She added, “Hence, it is important for ESOP to be taxed when the ESOP holder makes money and not before. If this is subjected to tax earlier, the holder needs to pay taxes before they really realise value from ESOPs. And therefore, prefer to sell these options to non-employees and really do not harvest the value of their contribution to the startup! And the startup is at risk of losing top talent.”
Need for increasing capital pool
The need to increase the share of domestic or Rupee capital in the Indian startup ecosystem has been underscored over the last year.
Industry body IVCA has also reiterated its recommendation to allow Indian provident funds, pension funds, university endowment funds, among others to be allowed to invest in AIFs as an asset class to pull in more Rupee capital into the domestic market.
“Every time there is an election or slowdown in the US, the pool of capital for Indian startups dries up. Contrast this with Mutual Funds which have been resilient despite FDI being pulled away from the Indian markets as it is easier for them to galvanise Rupee capital. We are looking for a Mutual Fund moment for investing,” said Siddarth Pai of 3one4 Capital.
In a statement, Anirudh Damani of added that a sovereign-backed fund of funds anchored by SIDBI could foster long-term partnerships and confidence among global investors, while creating a pool of patient capital.
Edited by Megha Reddy