Panel suggests abolishing LTCG tax on start-up investment
BENGALURU: The Standing Committee on Finance headed by ex-minister of state Jayant Sinha has
recommended to the Centre that the tax on long term capital gains (LTCG) should be abolished for all investments in start-ups, which are made through collective investment vehicles (CIVs) such as angel funds, alternate investment funds (AIF), and investment LLPs.
The report suggested that tax concessions be given to the start-ups which are designated by the Department of Promotion of Industry and Internal Trade (DPIIT) for minimum two years to push investments in the start-up ecosystem. The start-ups are, currently, challenged with liquidity concerns caused by the pandemic and the drying up of funds from Chinese investors.
The report titled — Financing the start-up Ecosystem —states that after the two year period, the Securities Transaction Tax (STT) may be applied to CIV so that revenue neutrality is maintained. It added that the STTs associated with the CIVs can be easily calculated and that the taxation system will be made fairer, less cumbersome and transparent.
The committee added that the current taxation system is advantageous to foreign investors compared to domestic since there are lesser jurisdictions and low taxes for fund management services in the former case. Besides, the house panel also recommended that the chief financial institutions in the country should also be made to divert a portion of their investible surplus into domestic funds for meeting capital requirements of the start-ups.
The role of the Small Industries Development Bank of India’s (SIDBI) Fund of Funds has also been emphasised in the report, calling for its expansion and disbursal of more funds to start-ups in order to be self-reliant. Earlier, the DPIIT had said that it is working on two start-up centric schemes — credit guarantee and seed fund — to enable easy lending to start-ups in the early ideation phase.
DPIIT WORKING ON TWO SCHEMES
To support start-ups, the government is working on credit guarantee scheme which would facilitate easy lending to these companies.
Besides, the contours of a seed fund scheme is also being worked upon. This will help start-ups, especially in the ideation to the proof of concept phase, to raise funds.