INTERIM BUDGET :Pass through for all VCFs

Govt has gone on the front foot to take on the slowdown. Interim Budget may hold out goodies for VCs, exporters and infra cos

THE government is considering a proposal under which investors in venture capital funds will have to pay the requisite taxes, instead of the funds themselves, as is the practice currently in certain sectors. If this proposal is implemented, it would reverse a policy change introduced in the 2007 Budget, which had stipulated that VC funds in all but nine industries would have to pay taxes. The change now being considered would restore what is known in tax jargon as the pass-through benefit to all VC funds, the majority of which are incorporated as trusts. In a further liberalisation, the government may also put registration of foreign venture capital funds under the automatic approval route, a move which would put them on par with foreign institutional investors (FIIs).
    A team of 6-7 officials from leading domestic private equity funds, law firms and the industry body met with senior finance ministry officials recently, said an industry official who was part of the meeting.
    This team made a presentation on key issues, including tax pass through for domestic venture capital funds and placing foreign venture capital funds on the automatic approval route, definition of the term 'promoter' to specifically exclude private equity players and simplifying the capital gains taxation regime.
    In a bid to channel venture capital/ private equity investments into certain sectors, the 2007 Union Budget had restricted the tax pass-through status to funds investing in few sectors like infrastructure, biotechnology, IT hardware and software development and nanotechnology.
    "Taxing an investor his distributive share in the income of the VCF is more equitable than taxing the VCF at the trust level. This ensures that investors subject to special tax regime — such as life insurance companies or foreign investors in the VCF, whose taxation in India is subject to the Double Tax Avoidance Treaty — are not discriminated against for having invested into the underlying portfolio companies through the VCF instead of investing directly," says Rajendra Chitale, MD, MP Chitale & Associates. The government is also considering easing of investment norms for various types of private equity funds. According to an official, the registration of foreign venture capital funds may require only a single blanket approval.
    Lack of clarity over foreign venture capital investments (FVCI) in India has led to several applications from foreign venture capital firms piling up with the Reserve Bank for approval under the Foreign Exchange Management Act (Fema).
FREE FLOW
THE PROPOSALS
Tax pass through for domestic VCFs Registration of foreign VCFs under automatic route
THE IMPACT
Tax will be levied at investor level not at trust/fund level
To eliminate double taxation Policy change may boost inflows
    THE process now involves the capital market regulator, Sebi, first approving the proposal, after which RBI needs to separately clear the FVCI application, which is not the case with FII registrations.
    However, in the recent past the central bank has been slowly opening the doors to foreign venture capital investors with riders. Currently, there are more than 100 registered foreign VCFs in the country and more than 120 Sebi-registered domestic venture capital funds.
    In the current environment, marked by large outflows, a change in policy may help boost inflows, feel industry watchers. According to industry estimates, private equity and venture capital investments have dipped to $13 billion in 2008 from $17.5 billion in 2007.
    reena.zachariah@timesgroup.com