The proposal in the draft Direct Taxes Code to give pass-through status to venture capital funds has come as a breather for domestic funds. Currently, foreign venture capital investors, most of them Mauritius-based, get tax exemption benefits under the double tax avoidance treaty between India and Mauritius. However, the domestic funds have pass-through status only for investing in 10 sectors. Any investment outside these sectors made by Indian venture capital funds attracts tax.
As many as 80% of venture funds active in India are based in or routed through Mauritius while the remaining are domestic ones. Once the draft Direct Taxes Code comes into effect, a greater number of VCs can directly raise funds from within the country and invest at home.
The 10 sectors specified by the government which offer pass-through status to domestic venture capital are nano technology, information technology of certain qualifying forms, seed R&D, biotechnology and pharmaceutical research, production of bio-fuels, construction and operation of certain hotels/connection centres having more than 3,000 of seating capacity, and dairy and poultry industries.
Domestic venture capital funds invested Rs 22,771 crore from June 2008 to March 2009 while foreign venture funds have invested Rs 23,047 crore in the same period, as per the data available on the website of market regulator Securities and Exchange Board of India (Sebi).
According to Venture Intelligence CEO Arun Natarajan, ?It will take two years for this proposal to get implemented. However, the plan will certainly push more Indian companies to launch venture capital funds in the country as it will not have much impact on the foreign funds.?
Clearstone Venture Advisors director Rahul Khanna says, ?This is a positive move and will help investment in sectors that did not have a pass-through status.?
Further, the draft also proposes to remove the securities transaction tax and rationalise capital gains tax and remove the distinction between long-term and short-term capital gains tax. This could have also have a positive impact on the Indian equity markets, feel market players.
?Once the draft direct code is implemented, the markets are likely to witness a big change. Abolition of the STT would be beneficial for brokers and the volume of trade will witness a surge,? says Motilal Oswal Securities managing director Raamdeo Agrawal. Currently, investor have to pay 0.125% STT on each transaction.
Some market players also believe the proposed tax code will give more money in the hands of the public and thus will boost their spending power. As voiced by Gopal Agrawal, head (equity), Mirae Asset Global Investment Managers, ?I don?t think it will have much of the impact on the mutual fund industry, but certainly some money will be saved and which can be invested for long-term investments.?
