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PE/VC industry expects clarity on long-term capital gains tax rate in 2013-14 budget

26 February, 2013

As Budget 2013 looms ahead, VCCircle brings you the expectations of the private equity and venture capital industry regarding taxation of transactions. Industry bodies have already made pre-budget representations to the finance ministry regarding most of these changes. Here are the top expectations of the industry, with input from Tushar Sachade, KPMG’s head of private equity tax, and Gautam Mehra, executive director (tax & regulatory services) at PwC India

1. The biggest demand of the industry is the tax pass-through status for all categories of AIF (alternate investment funds) under the new SEBI guidelines. In the last budget, the pass-through status was given to all industries under the domestic venture capital funds (DVCF) guidelines (which became the AIF guidelines since). But when SEBI introduced the AIF guidelines, the pass-through was only given to the AIF Category I investors although they should be extended to Category II and Category III.

Since pass-through is not applicable for AIF Category II under which real estate funds come into play, the current regulations are also creating havoc in that space. Commenting on the same, Bikram Sen, director and CEO of Arthaveda Fund Management, said, “Government needs to give us total clarity on pass-through status and tax applicable to the investors. Earlier, under VCF, it was allowed to everyone but it is not the same with AIF. Because of that, it is creating havoc in income tax claims.”

2. Under Section 112, the finance ministry reduced the income tax rate to 10 per cent (from 20 per cent) on long-term capital gains, applied to exits from unlisted public companies. But there is an anomaly in the way the law has been written and currently, it only applies to unlisted public companies. It needs to be clarified that the law also applies to unlisted private companies.

3. The finance ministry has partly accepted the recommendations of the Shome Committee and has given assurance that GAAR (General Anti Avoidance Rule) will be postponed till April 1, 2015. There is a grandfathering of investments before August 30, 2010. From PE industry perspective, a lot of funds are structured as pooling vehicles out of Singapore and Mauritius. The Shome Committee also recommended that pooled vehicles should not be considered for GAAR. Also, there are some other recommendations – if taxation certificate is obtained from jurisdictions like Mauritius or Singapore, GAAR should not apply. So the industry expects that these provisions will also be included in the amendment besides postponement and grandfathering of GAAR.

4. In last year’s budget, there was a lot ambiguity regarding the changes made to taxation on indirect transfer. There is a significant impact on the PE industry as distributions to limited partners (LPs) after the exit could fall under the definition of indirect transfer. The industry wanted to exclude this implication on LPs and expects this will be implemented in this year’s budget.

5. The industry also wants the government to clarify enforceability of rights culminating from put/call arrangements.

6. Finally, it wants the government to notify the criteria defining ‘angel investors,’ for exempting private companies from tax on consideration (that exceeds fair market value of shares) received for issue of shares.

(Edited by Sanghamitra Mandal)


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PE/VC industry expects clarity on long-term capital gains tax rate in 2013-14 budget

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