Budget bite: Indian VC funds cry out

After the IT and automobile industries, it is the turn of the Indian venture funds to scream foul.

ET Spotlight
NEW DELHI: After the IT and automobile industries, it is the turn of the Indian venture funds to scream foul.
The FM’s proposal with regards to the tax “pass-through” provision for venture capital funds will cause irreparable harm to innovation and entrepreneurship in India and seriously discourage the growth of venture capital in India, said Indian Venture Capital Association (IVCA) in a statement.
Pointing out that the VC capital is vital for myriads of start-ups to achieve their full potential, IVCA chairman Saurabh Srivastav said the provision is unlikely to garner any significant tax revenues as all foreign venture funds will bypass the issue by investing through tax treaty-friendly companies.
“The impact will only be on the fledgling domestic venture capital industry which any way represents only a small fraction of the total investments that the FM is targeting,” he said.
The government proposes to restrict the “pass-through” to VC funds operating only in half a dozen areas specified by it. “This measure is flawed on two counts. Firstly, nowhere in the world do governments seek to be clairvoyant and direct in those areas of innovation where venture capital is allowed to operate. This is an issue best left to entrepreneurs and people who are willing to invest in them,” claimed Srivastav.
“For instance, if the government had drawn up such a list two decades ago, computer software would not have been on it. This list has some obvious, inexplicable exclusions such as telecom, value-added services in the wireless arena, media, etc. But the main point is that no one, certainly not the government, is competent to draw up a list of what are the promising areas of tomorrow. If the government's intention was to exclude a specific sector, then that would have been better though not still a good approach,” he added.
The second issue comes from the government implying that the tax “pass-through” represents some sort of incentive. The fact is that the “pass-through” only eliminates double taxation. “Worldwide, it is a standard practice that VC funds are not taxed twice and considered “pass-through vehicles”, with the tax being paid in the hands of investors, IVCA has pointed out.
In fact, in most countries such “pass-through” is routinely available to any pool or group of investors even if they do not represent a registered VC fund. Even in India, any non-corporate vehicle, such as a partnership, is not taxed twice.
Section 10 (23FB) and Section 115U were introduced precisely to bring this treatment on par with rest of the world and as a result venture capital investments in India grew from a $1 billion in 2000 to $7 billion last year, representing perhaps the biggest single element of FDI, but equally creating several new enterprises and enabling existing Indian companies to have the funds for foreign acquisitions.
“We feel that the current proposals are regressive and retrograde and must be dropped,” said Srivastav.
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