Higher Tax Rates for VC and PE Investors
In the new budget announced by Finance Minister Arun Jaitley, there is a provision that imposes short-term capital gains tax on unlisted capital assets held for less than three years. Currently, an asset would be a short-term capital asset or a long-term capital asset if it has been held for less than a year or more than a year respectively. By new terms, it would mean that an investor who exits a company before three years is liable to pay a short-term capital gains tax of more than 30% as opposed to the long-term capital gains tax of around 10%-20%.
While venture capitalist investments will be most affected by this – as they stay invested for a shorter time period – follow-on private equity investments in the same firm will also be affected. For instance, if a private equity firm has invested in an unlisted company in 2011, invests in the same firm again in 2015, and exits in 2016, the first round of investment will not demand taxation but the second round will demand the entire 33% taxation. This is a wet blanket for the investors as they are already struggling to generate adequate returns amidst a decelerating economy.
“Some of the budget measures like the tax treatment for investors in unlisted companies, may not have much of an impact on private equity investors, it is sure to have a huge impact on venture capitalist investors,” said S. M. Sundaram, partner and Chief Financial Officer at Baring Private Equity Partners India.
Prakash Nene, Managing Director and Chief Financial Officer at a domestic private equity firm says this move by the government seems unintended as of now and that they are going to put across a presentation to the government through IVCA (Indian Private Equity and Venture Capital Association) which works to promote and develop the private equity and venture capitalists industry in the country.
Source: LiveMint & The Wall Street Journal
Arun Jaitley, finance minister Arun Jaitley, increase property tax rate, Indian Private Equity and Venture Capital Association, Long-term capital gain, property tax rate
