House Panel for Abolishing Long-Term Capital Gains Tax on All Investments in Start-Ups

A Parliamentary panel has suggested abolishing tax on long-term capital gains for all investments in start-ups made through collective investment vehicles (CIVs). It has also stressed encouraging investments from private equity and venture capital outfits, larger companies and High Networth Individuals to meet their financing needs.

“The committee would like to strongly recommend that tax on long-term capital gains be abolished for all investments in start-up companies (as designated by DPIIT) made through CIVs such as angel funds, AIFs, and investment LLPs. At a minimum, this should be done for at least the next two years to encourage investments during the pandemic period,” according to the 12th report on ‘Financing the start-up ecosystem’ compiled by the Standing Committee on Finance.

It added that after the two-year period, the Securities Transaction Tax may be applied to CIVs to maintain revenue neutrality.

On the need for adequate finance and support for start-ups and innovators, the report said, “the role of PE/VCs, larger companies, HNIs, family offices, and other institutional investors needs to be encouraged. These entities invest in young and fledging start-ups as well as mature companies in the form of risk capital and are significant catalysts of economic growth and socio-economic value creation.”

The Standing Committee on Finance, set up under the Ministries of Finance and Commerce and Industry, is chaired by former Minister of State for Finance Jayant Sinha.

Investments by CIVs must be done transparently and at fair market value, the committee said, adding that it is easy to calculate the STT associated with these investments.

It also proposed that there should be no punishing of domestic risk capital at any level, as the current tax disparity is proving advantageous to foreign capital through low-tax jurisdictions and low taxes for fund management services. “This will establish a level playing field for domestic investments vis-a-vis foreign investments and domestic listed vis-a-vis unlisted securities,” it said.