A Parliamentary panel has been set for the abolition of long-term capital gains (LTCG) tax for all investments in startups which are made through collective investment vehicles such as angel funds, alternate investment funds and investment Limited Liability Partnerships.
The Standing Committee on Finance, chaired by former Union Minister of State for Finance Jayant Sinha, has strongly recommended the abolishing of this tax at least for the next two years to encourage investments amid the pandemic on all investment vehicles into startups.
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.
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.
“The Committee would like to strongly recommend that tax on Long Term Capital Gains be abolished for all investments in startup companies (as designated by DPIIT) which are made through collective investment vehicles (CIVs) such as angel funds, AIFs, and investment LLPs,” the committee said in its report “Financing the Startup Ecosystem”.
The committee also recommended that the exemption for income on investments made before March 31, 2024, subject to the investment being held for a period of at least 36 months as incentivized in the Finance Act, 2020, should be provided to long-term and patient capital invested across all sectors.
India’s startup sector welcomes the recommendation of abolishing long-term capital gains (LTCG) in startup investments. Industry leaders said that the move would open the floodgates for Rupee (domestic) capital to flow into the sector, which has been lacking since a long time.