India’s private equity and venture capital ecosystem has always reflected the pulse of the broader economy – resilient, fast-moving, and deeply impacted by policy shifts. After two years of subdued activity, 2024 marked the beginning of a cautious rebound, driven by regulatory tailwinds, macroeconomic stability, and a new wave of entrepreneurial energy.
PE/VC investments in the first half (H1) of 2025 declined year on year but were higher compared to H2 2024, according to the Indian Venture and Alternate Capital Association’s Private Equity and Venture Capital Trendbook 2025. This resurgence was driven primarily by VC and growth investments, as well as an increase in startup investments.
A deeper analysis reveals that while macro-economic factors and supportive regulatory measures played a significant role, the decisive factor for a sustained investment flow is tax clarity. For global investors, tax clarity is not a peripheral consideration but a fundamental pillar of their investment thesis. It is the ability to accurately forecast returns and mitigate risk. Lack of clarity, as seen with certain tax reforms, continues to act as a roadblock to the smooth inflow of foreign capital, even amid otherwise positive market conditions.
Some key tax reforms impacting PE/VC investments in India are outlined below.
Anti-abuse provisions on acquisition of shares of listed companies
While anti-abuse tax provisions were historically confined to private transactions to prevent tax evasion, an amendment in the Indian tax laws extended these rules to publicly traded companies/listed companies. This provision stipulates that any transfer of shares below their fair market value (FMV) can trigger a tax liability on the difference, creating a significant commercial risk for investors.
This change has proven particularly problematic in complex M&A/PE and corporate transactions. The commercially negotiated share price, agreed upon months in advance, may be lower than the market's closing price on the day the deal is finalised. Factors like regulatory delays or stock market fluctuations can cause this price disparity. Under these anti-abuse provisions, this gap between the agreed-upon price and the FMV is subject to taxation, effectively penalising a legitimate, market-driven transaction.
Despite strong appeals from industry stakeholders, there has been no clarity on the non-applicability of these rules to quoted share deals, potentially impacting M&As and related nuances around deemed gift tax issues. Given that these transactions are market-driven, genuine and legit, these anti-abuse provisions should not be applicable for transactions undertaken through stock exchanges. This is also in alignment with the intent of the introduction of these provisions.
Tax residency certificate (TRC) as conclusive proof for treaty
India’s apex tax authority stated (vide Circular No. 789 dated April 13, 2000) that a TRC is valid proof of both residency and beneficial ownership. A recent Delhi High Court ruling [Tiger Global International III Holdings versus the Authority for Advance Ruling (2024)] further solidified this position, reinforcing the idea that a TRC is a definitive document. The ruling provided crucial commercial reassurance by stating that the tax authorities cannot scrutinise a TRC unless there is a clear case of tax fraud or a sham transaction. This was seen as a major win, especially for investors routing funds through jurisdictions like Mauritius, as it prevented unwarranted scrutiny simply due to a jurisdiction's tax-friendly status.
However, this positive development for the market was short-lived, as the Supreme Court of India stayed the High Court's ruling, keeping the issue unresolved. This has created significant market uncertainty for foreign investors and could impact future investment decisions. The final judgment will be a decisive factor in shaping the landscape for international capital flows into India.
Given the conflicting judicial precedents on whether the TRC alone suffices, greater clarity from tax authorities on the interplay between the TRC, ‘substance over form’, Limitation of Benefits (LOB) clauses, and Base Erosion and Profit Sharing (BEPS)/Multilateral Instruments (MLI) standards will be critical. Ambiguity around this will deter the investors from making a sizeable investment into the Indian economy.
Buyback considered as dividend
Earlier, companies buying back shares were subject to a 20% buyback tax, plus applicable surcharge and cess. Recent amendments in the Indian tax laws have aligned buyback with dividend taxation, shifting the liability to shareholders.
Under this framework, the entire buyback consideration is taxable as dividend income, with no deduction for original cost of shares. The cost of acquisition is instead treated as a ‘deemed capital loss’ that can only be used to offset future capital gains. This will create significant inefficiency, as investors will be taxed on their gross proceeds while their investment cost is locked away as a loss, which may not be fully utilised, effectively making the initial investment a sunk cost for those with no future gains.
These changes are particularly problematic for foreign investors, who face a critical ambiguity regarding the application of Double Taxation Avoidance Agreements (DTAAs). The reclassification of buyback proceeds as ‘deemed dividend’ creates a conundrum over whether to apply the ‘capital gains’ or ‘dividend’ article of a DTAA.
While the shift to shareholder taxation may have been intended to simplify the tax regime, it has inadvertently introduced significant complexities. It is a policy that needs a fundamental re-evaluation to ensure it does not inadvertently penalize genuine investors and undermine India's competitiveness as an investment destination.
Abolition of angel tax
Angel tax, a provision that taxed private companies when shares were issued above their FMV, created significant commercial hurdles. While its objective was to prevent the laundering of illicit funds, its application had a detrimental effect on India's burgeoning startup ecosystem.
For startups, especially pre-revenue and asset-light ones, valuation is often based on intangible factors like market potential, brand value and founder expertise. These cannot be accurately captured by traditional valuation methods like Net Asset Value (NAV) or Discounted Cash Flow (DCF) models. Consequently, valuation assigned by investors frequently exceeded the calculated FMV, triggering an unwarranted tax liability for companies. This effectively penalised genuine capital infusion, deterring both domestic and foreign investors.
The abolition of angel tax is a transformative step that will strengthen India's position as a global startup hub. It not only aligns India’s tax framework with global best practices but also reinforces the government’s commitment to nurturing a vibrant, risk-taking, and innovative economy. This policy change is a testament to the understanding that a predictable and fair tax regime is a prerequisite for attracting the capital necessary to fuel the next wave of technological and commercial growth.
Conclusion
India’s PE/VC market is regaining momentum, underpinned by structural reforms, entrepreneurial vibrancy, and greater tax certainty. Recent tax reforms have significantly boosted investor confidence and streamlined the ease of doing business. This has made India an increasingly attractive destination for private capital. However, ongoing ambiguities surrounding treaty eligibility and scope of anti-abuse rules, introduce an element of uncertainty and warrant close monitoring by investors.
When tax regulations are unambiguous and stable, investors gain the confidence to make long-term commitments, knowing their returns won’t be eroded by sudden policy changes or retroactive demands.
With continued policy focus on simplification and investor confidence coupled with clear and certain tax laws, India is well-positioned to consolidate its role as a leading destination for private capital in the years ahead.
Vishal Hakani is a Managing Director and M&A Tax Leader at Alvarez & Marsal India.