The government has finally plugged this differential by applying a uniform long-term capital gains tax rate of 12.5 per cent for resident and non-resident investors, as well as for listed and unlisted securities.

Siddarth Pai, Founding Partner | CFO | ESG Officer, 3one4 Capital

The Indian start-up ecosystem long suffered from the short-end of the regulatory stick. Many benefits that were bestowed to all companies were denied to unlisted companies due to legacy reasons. Chief amongst these were capital gains at twice the rate of listed securities and angel tax. The Budget has helped plug these two issues while announcing more rationalisations.

Start-ups have long suffered a tax rate that was more than twice the rate of their listed counterparts. Investments in start-ups are mainly in the form of primary capital infusion, with the funds being used by for new asset creation, hiring employees, and launching products and services. The majority of the sales in the listed market are between two investors, with the company not directly benefiting from these share sales. Tax policy has always guided investments into new asset creation by having tax incentives or lower tax rates. However, India chose to tax these investments at twice the rate of sales between two investors in the stock market.

Further, the tax rate for non-residents was half the tax rate for residents investing in unlisted start-ups. This, along with angel tax, has prompted many Indians to shun investing in start-ups, resulting in over 85 per cent of the capital raised by Indian start-ups emanating from foreign sources. This is why the funding winter has been ongoing for start-ups as global investors pull back.

The government has finally plugged this differential by applying a uniform Long-term Capital Gains tax rate of 12.5 per cent for resident and non-resident investors, as well as for listed and unlisted securities. This will prompt greater rupee participation in start-ups and lead to stronger flows to Indian AIFs.

The removal of indexation is concerning, but the 37.5 per cent cut in unlisted LTCG rate from 20 to 12.5 per cent offsets the 5.76 per cent CAGR of the Cost Inflation Index over 20 years. This mainly benefits securities, though property investors might still feel the impact.

Removal of angel tax

Angel tax was introduced in 2012 under a series of measures titled “prevention of the generation and circulation of unaccounted funds”. What was an anti-abuse measure became a tax harvesting section as start-ups who issued shares at a premium saw the taxman comparing their projections vs their actual performance and taxing the difference! Missing projections is a commercial risk, not a taxable event.

Despite numerous changes, exemptions, etc, Angel Tax remained an albatross across the neck of Indian start-ups. This removal without conditions is a major boost for Start-up India.

GIFT IFSC Changes

AIFs in GIFT IFSC can look forward to a Variable Capital Company (VCC) Structure, a globally recognised and accepted vehicle for investment funds. The Section 68 exemption to GIFT IFSC AIFs, on par with SEBI AIFs, is a welcome move.

Budget has set the tone for the new NDA government. The mantra of “rationalisation and simplification” is off to a strong start.

The government has finally plugged the differential by applying a uniform long-term capital gains tax rate of 12.5 per cent for resident and non-resident investors, as well as for listed and unlisted securities

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