Murthy panel seeks favourable tax regime for VCs, PEs

Pitching for drastic changes in norms governing venture capital and private equity funds, a Sebi panel has suggested favourable tax regime and measures to attract long-term funds from domestic and overseas investors.

The recommendations of the committee, headed by Infosys founder N R Narayana Murthy, come at a time when the government has unveiled the ambitious ‘Start Up India’ campaign to boost entrepreneurship and create more jobs.

Apart from calling for favourable taxation framework and ways to unlock domestic capital pools, the panel has also recommended promoting onshore fund management and reforming the current Alternative Investment Fund (AIF) regime. A significant recommendation is for introduction of Securities Transaction Tax (STT) for private equity and venture capital investments.

“Given the high risk and relatively illiquid and stable nature of private equity and venture capital, it needs to at least be treated at par with volatile, short-term public market investments for taxation,” the panel, which submitted its report to Sebi, said. VC funds and private equity funds with fund managers domiciled in India, that have been registered with Sebi post 2012, have been classified as AIFs.

According to the committee, an appropriate rate of STT could be introduced “on all distributions of AIFs, investment, short-term gains and other income and eliminate any withholding of tax. After STT, income from AIFs should be tax free to investors”.

To ensure that there aren't too much hassles in attracting overseas funds, it has said the government should clarify the rules for investment by NRIs in AIFs on a non-repatriation basis. The regulator has sought comments from the public till February 10 on the report.