Well begun, but only half done

29 February, 2016

All Union Budgets are tightrope walks, but this one saw the budget balanced on a knife’s edge. Multiple, critical sections of the economy cried out for nation building, even while the economy punditry issued warning after warning on not crossing the red line on the fiscal deficit. This tug-of-war explains why finance minister Arun Jaitley has been so frugal with his attention to industry, to investors and to stock markets in this Budget, mostly fobbing them off with procedural simplifications and the promise of a friendlier interface with the tax department.

Jaitley’s focus on long-term nation building such as agriculture, rural development, social welfare and infrastructure have rightly received the lion’s share in the policy attention and budget allocation which capture the prime minister’s “Sabka Vikas” vision, while building the economic back bone by promising to rejig the Fiscal Responsibility and Budget Management framework as well as amend the RBI Act to legislate the new monetary policy committee.

While many segments, especially the masses of India cheered this budget, there was only restrained applause from the VC/PE industry. The theme of “Start Up India, Stand Up India” has been a recurring leitmotif in the past year. Policymakers on this front have been highly engaged with the entire spectrum of leadership at the Ministry of Finance and the Central Board of Direct Taxes, partly through SEBI’s Alternative Investment Policy Advisory Committee (AIPAC) report, as well as frequent interactions with the Indian Private Equity and Venture Capital Association (IVCA). Hence expectations were very high. 

All of them were focused on the one objective of making the vital fuel of entrepreneurship for startups to grow through the magic of capital and capability provided by VC/PE funds. This year India has seen over $20 billion of VC/PE funds of which 85 per cent came through offshore funds. There is an old adage in any family settlement in India–everybody should be a little unhappy, but not entirely unhappy with the conclusion. The FM has truly delivered on that theme.

Of the four important suggestions of the industry, two received favourable outcomes. The FM completely delivered on making FDI investments in Alternative Investment Funds (AIFs) to be tax efficient. Withholding tax for FDI in AIF is now based on the rates in force (investors from Singapore and Mauritius would not be taxed) and the recent announcement permitting PFRDA (Pension Fund Regulatory and Development Authority) funds to invest in VC/PE would also not suffer any withholding tax.

The industry advocated for parity in taxation between liquid listed investments, and the riskier, illiquid investments that AIFs make. There was a step in the right direction towards the half-way mark, of reducing the period of holding from three to two years, but yet one year short of the one-year holding period required for the listed entities.

On the important aspect of “safe harbour”, an item that can only be achieved through the Finance Bill, there was a deep disappointment. The FM has used the word “certainty” in his speech, and this was the one big certainty the industry had asked for, but was left wanting. This would mean that an India-based fund manager of an offshore India-focused fund could be asked to pay tax as if the income were earned in India, even though the fund were based in a tax exempt location like Mauritius. This lack of “certainty” means doing business continues to be very complex for 85 per cent of VC/PE investors, increasing risk and expense while exiting investments.

The FM also failed to give comfort to the Indian AIFs that their income will only be taxed as investment income and never as business income. However, this can be potentially ameliorated through an administrative notification and perhaps given the progressive tone on simplification; one can hope to see this during the year.

Coming to the most important aspect of startup and MSME companies, the PM’s vision was fully delivered by the FM. The startups are eligible for tax holiday for three consecutive years of their choice. Also, the long-term capital gain arising out of sale of any other asset, if invested in a specified fund or as subscription to shares of startup companies, would be exempt from tax.

Prime Minister Narendra Modi’s speech at the “Start Up India, Stand Up India” initiative conclave in January got a rousing reception from about 2,000 young men and women. His most important contribution has been his ability to convince the young people of this country (and their old-school parents) that failing at entrepreneurship is not a stigma that will stay with you for the rest of your life.

Gopal Srinivasan is the chairman of TVS Capital Funds and the vice chairman of the Indian Venture Capital Association.


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Well begun, but only half done

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