While the entrepreneurs and investors are celebrating, Union Budget 2016 has not given much reason to cheer for the private equity community.
Private equity funds demanded more leeway for foreign investors to invest in Indian companies. The demands included tax exemption for Alternative Investment Funds (AIFs) and removal of service tax for foreign investors. PE community also demanded a pass-through status for all types of income under AIF—business or non-business.
The Budget has responded to many demands of private equity funds, though they are still calling for more clarity. “The positive news for private equity is that there will not be any withholding of tax for foreign investors in AIFs and that along with a possible clarification from the government that all long-term capital gains for AIFs will not risk classification as business income could facilitate foreign investment into AIFs,” said Padmanabh Sinha, managing partner of Tata Opportunities Fund at Tata Capital.
“The fact that the Budget waived off the 10 per cent Tax Deducted at Source (TDS) for foreign investors is a respite but there were surely certain dampeners like tax on income above Rs 10 lakh through dividends,” said Prakash Nene, managing director at Multiples Alternate Asset Management.
Apart from clarity on taxation, the industry is happy to get a respite on long-term capital gains taxes. “This in conjunction with the reduction in the applicable period of capital gains for unlisted companies to two years is favourable. I would also hope that changes in safe harbour provisions which were announced for public market funds last year would be notified for private equity funds as well,” said Sinha. “For PEs, the benefits are two years instead of three years for capital gains in unlisted companies,” said Harish HV, partner, Grant Thornton India LLP.
“The biggest respite was reduction of long-term capital gains from three years to two years,” said Dhanpal Jhaveri, managing partner – private equity of Everstone Capital Advisors.
Other positive announcements include clarification on MAT, impetus for agriculture and infrastructure and a controlled fiscal deficit. “The government has clarified that MAT will not be levied on foreign investors retrospectively which is a good move,” said Nene of Multiples Alternate Asset Management.
“In addition, investment in agriculture and infrastructure should see their investee companies benefiting in a big way as these are expected to translate into growth. The new reforms around PPP and divestment should generate more investment opportunities for PEs. On the negative side, the additional tax on dividend and other tax increases will impact them,” said Harish from Grant Thornton.
“Fiscal discipline along with a cap on borrowing programme is positive news for the economy along with continued rationalisation of taxation policies. Though markets expected higher bank recapitalisation, the fact that he (finance minister) indicated that he is willing to do more is a good move,” said Jhaveri of Everstone Capital Advisors.
Wishes not fulfilled
This Budget failed to clarify safe harbour norms for PE funds and waive off business income taxation under AIFs. “On ‘safe harbour’, there was a deep disappointment. The finance minister has used the word ‘certainty’ in his speech, and this was the one big certainty the industry had asked for, but was left wanting,” said Gopal Srinivasan, chairman and MD of TVS Capital Funds Ltd and vice chairman of IVCA.
“I would also hope that changes in safe harbour provisions which were announced for public market funds last year would be notified for private equity funds as well,” said Sinha of Tata Capital.
“The finance minister 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,” he added.
Good times ahead for VCs
A number of announcements starting from the Startup India Fund to tax rebates of up to three years of commencement of a company have waved a green flag for entrepreneurship.
“The Budget is a welcome sanction for the startup ecosystem with major relief announcements such as tax exemption for three years after setting up the company. Also, introduction of hubs to support SC/ST entrepreneurs is definitely a step ahead towards promoting startup India campaign across the nation. Instant and seamless registrations will ensure that budding entrepreneurs receive the maximum support from the government. However, it would have been great if the finance minister had included some reforms to accelerate angel investment model as well. Nevertheless, we hope this year will prove to be a good start towards taking the Indian startup industry to the next level,” said Apoorv Ranjan Sharma, co-founder, Venture Catalysts.
“The prime minister’s vision was fully delivered by the finance minister. The startups are eligible for tax holiday for three consecutive years of assessee’s 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,” said Srinivasan of TVS Capital.