The announcements made by the Finance Minister yesterday while moving the amendments to the India Finance Bill, 2012 have led to a wave of reassurance from India to the foreign investors including Private Equity/Venture Capital investors.
The relaxation enshrined in the amendments have come as a ray of light piercing the cloud of uncertainty and falling on the investor community at large.
Capital gains on exit
This announcement has been a bonanza for the foreign investor segment specially the Private Equity and Venture Capital investors.
Currently, non-resident investors including PEs are liable to tax at 20% on long-term capital gains arising from sale of unlisted equity shares. The Finance Bill proposes to reduce the tax rate to 10% so as to bring such investors at parity with FIIs.
The Finance Bill also proposes to levy Securities Transaction Tax at the rate of 0.2% on sale ofunlisted equity shares under an offer for sale. Consequently long-term capital gains arising on such sale would be exempt to taxwhile short-term capital gains would be liable to tax @ 15%.
Typically in PE/VC deals, the exit mechanism is either by way of an IPO or a secondary sale to strategic investors. The reduction of the capital gains tax rate to 10% will definitely lead to reworking of the financial model in terms of reduction of the tax cost leading to a higher value for the seller. This proposed change in the law has the potential to spark a flurry of deals in the near future.
Similarly, exits by using the IPO mechanism have become more lucrative given the tax benefit announced.
General Anti Avoidance Rules vestwide powers to tax department to treat every arrangement as impressible unless proved otherwise.This caused hue and cry among investors and taxpayers.
The widespread representation against GAAR and reactions from the investor community has collectively resulted in the Government to introduce key dilutionin the proposals. The significant amendment announced is the deferment of the applicability of GAAR by one more year. As a gesture the Finance Minister has announced that this deferment is mainly to allow time to investors and tax department to address all issues. This matured approach is in line with proposals made by Governments of several countries.
GAAR will now apply from Financial Year 2013-14. In addition to this, it has also been announced that for initiating action under GAAR the onus to prove that a particular arrangement triggers GAAR will be put entirely on tax authorities (and not the taxpayer). A GAAR approving panel will include an independent member to ensure objective and transparent applicability of GAAR regulations and taxpayers (resident or non-resident) could approach Advance Ruling Authority (AAR) to obtain a ruling on whether a particular arrangement will trigger GAAR.
The other frequently discussed topic has been on the retrospective amendments. While the Finance Minister did clarify that the retrospective amendments will not be used to reopen any cases where assessment orders have already been finalized, one will have to wait and watch how this is introduced in the circular and also how this would be implemented in practice. This announcement needs to be cautiously understood and interpreted. The phrase ‘assessment orders have been finalized’ are worth noting and need to be observed in the policy circular to be issued.
In addition to the above amendments, there have been other announcements which have provided stimulus to Venture Capital investors.
These announcements will go a long way in reaffirming confidence of investors in the Indian market. This should also result in stabilizing financial and currency markets in India.
(Anil Talreja –Partner and Amit Bhattar – Deputy Manager are from Deloitte Haskins & Sells. Views expressed are personal.)