To help start-ups mobilise capital at affordable rates during the initial stages, the Department of Industrial Policy and Promotion (DIPP) will soon take up with the Finance Ministry a proposal to grant Capital Gains Tax (CGT) exemption for those investing their capital gains in regulated/notified Venture Capital (VC) and angel funds.
The budget had proposed CGT exemption for persons investing their capital gains only in regulated / notified Fund-of-Funds (FOF).
FOFs, as per the DIPP’s Start-up Action Plan, are professionally managed funds that will not invest directly in start-ups, but contribute to the capital of VCs registered with capital markets regulator SEBI. These VCs, in turn, provide the needed early stage funding for start-ups. CGT is the tax-on-profit made by a person through sale of a capital asset (such as an investment or real-estate).
Official sources told The Hindu that according to the Finance Ministry, the FOFs that would be notified for the purpose of CGT exemption would only be those either recognised or owned by the government, including the Small Industries Development Bank of India’s FOF and the CANBANK VC funds-managed ‘Electronic Development Fund’, that is supervised by the Electronics & IT Department to push the ‘Digital India’ initiative.
The sources added that the Finance Ministry did not want VCs and angel funds to also be notified (as funds in which persons can reinvest their capital gains to avail CGT exemption), saying this could lead to misuse through ‘Related Party Transactions’ (RPT). RPTs are transactions such as sale / lease of property between the company and its related parties, including directors, key managerial personnel or their relatives. The sources said that DIPP would hold a meeting with the Finance Ministry to take up the issue of allowing SEBI-registered VCs and angel funds to also be ‘notified’ for the purpose of CGT exemption.
