House Panel Favours Abolition of LTCG Tax on Startup Investments

The Standing Committee of Finance chaired by the BJP lawmaker Jayant Sinha in its report suggested that the tax on LTCG (Long Term Capital Gains) should be removed at least for the next two years to encourage investments amid the pandemic. The report titled ‘Financing the startup ecosystem’ was released on 15 September and was submitted to the Lok Sabha speaker last week.

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Focusing on ease of doing business, the committee strongly suggested abolishing investment tax acquired from collective investment vehicles such as angel funds, alternate investment funds, and investment Limited Liability Partnerships for at least the next two years. There is a need to incentivize large PE/VC funds and the downside is very little. Also, there is a need to support the startups which have come up with solutions amid the outbreak.

Currently, foreign investors are taxed at 10 percent while domestic and private equity investors are charged at 20 percent in their LTCG taxation. The move is expected to take care of the huge disparity that favors foreign investors. The reform has been applauded by entrepreneurs, for it will open up floodgates of domestic investment in the Indian startup ecosystem which was lacking earlier.

Investment in startups would propel jobs, demand creation, and will promote economic growth. Indian startups are mostly dependent on foreign funds and more than 80% of capital going into India’s unicorns comes from foreign sources. Amendments in taxation policy will help reduce India’s dependence on foreign funds and will lead domestic startups towards self-reliance. The committee said that it will provide a level playing field for Indian and foreign investors.

According to the panel Securities Transaction Tax (STT) may be applied to CIVs after these two years so that revenue neutrality is maintained. India’s ability to pick up its economy after being hit by COVID lies in strengthening startups, which can help with problems like stalling of investment and demand contraction.

The Small Industries Development Bank of India would play a crucial role in scaling up startups and unicorns by disbursing more funds. The move will support India’s notion of becoming more self-reliant and secure startups with large domestic growth funds.

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