Reducing the additional tax burden will encourage domestic and global venture capitalists to invest more in new age businesses, as per experts.
The recent reduction of Long-Term Capital Gains Tax is expected to give a fillip for the start-up ecosystem. Reducing the additional tax burden will encourage domestic and global venture capitalists to invest more in new age businesses, as per experts.
In her latest Budget speech, Finance Minister Nirmala Sitharaman said, “Long term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 per cent.”
A capital gains tax is a tax imposed on the profits made from selling a non-inventory asset. This tax is typically incurred when selling items such as stocks, bonds, precious metals, real estate, and property.
Long-Term Capital Gains Tax (LTCG Tax) is imposed on profits from selling assets held for a long-term period. For real estate, this period is usually 24 months or more; for listed shares and equity mutual funds, it is 12 months or more; and for unlisted shares and other assets, it is generally 24 months or more.
Now, the government has mentioned that the long term capital gains tax from unlisted shares for residents would be 12.5 per cent (without indexation) from 20 per cent (with indexation). This new provision came into effect on July 23, 2024.
Mitesh Jain, Partner, Economic Laws Practice says that lower tax burden on potential returns on shares of unlisted companies will make investing in start-ups more attractive. He adds, “This is especially significant as start-ups offer high returns, suggesting a potential shift in investor preferences away from listed companies to high-growth unlisted start-ups.”
Start-up shareholders typically purchase shares in installments over several fiscal years. It is now possible to calculate long-term capital gains for both resident and non-resident sellers without having to use the cost inflation index for each tranche on a year-by-year basis, says Abbas Jaorawala, Senior Director and Head Direct Tax, Khaitan Legal Associates.
Jaorawala adds, “This should enable ease of tax computation, provide certainty to investors and speed-up negotiations during share sale arrangements.”
However, not all are optimistic about this new change. Some feel that this reduction would only marginally improve the sentiment of investors and not beneficial in the long run.
“The recent reduction in long-term capital gains tax on unlisted assets has been touted as a boon for start-ups, but it's more of a token gesture than a transformative policy shift,” says Appalla Saikiran, Founder & CEO, SCOPE.
Saikiran further highlighted that the ease of doing business in India continues to be problematic, as start-ups are hindered by bureaucratic red tape and intricate compliance regulations. Simplifying GST filing, alleviating labor law complexities, and establishing a more start-up-friendly regulatory framework would have been more beneficial, she adds.
In terms of taxation structure, one of the biggest benefits for the start-up ecosystem was the removal of the Angel tax. The tax abolition will come into effect from April 1, 2025. Finance Minister Nirmala Sitharaman has said that the aim of the move is to help the Indian start-up ecosystem. It is expected that this move will help increase the funding of start-ups.
Talking about the already pending cases existing under angel tax, the Finance Minister told the Economic Times, “My approach would be to see how best we can sort this out. Because it can't be that we've removed a tax but those litigations are going to hang fire.”
The Indian start-up ecosystem is one of the third largest ecosystems in the world. As of June this year, the Department for Promotion of Industry and Internal Trade (DPIIT) recognised 1.40 lakh entities as start-ups. It remains to be seen how the Union Budget measures will enhance the start-up ecosystem.