Narayana Murthy panel seeks favourable tax regime for VCs, PEs

The panel said PEs and VCs need to be treated at par with volatile, short-term public market investments for taxation

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.

Venture capital 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 non-resident Indians (NRIs) in AIFs on a non-repatriation basis.

Clearing the ambiguity in this regard would help NRIs invest in AIFs using funds in their rupee NRO (Non Resident Ordinary Rupee) accounts, among others.

"Once implemented, the recommendations will help attract significantly more capital from offshore and Indian investors into Indian private equity and venture capital," the panel said in its report.

Sebi had constituted a 21-member standing committee 'Alternative Investment Policy Advisory Committee' in March 2015 with the mandate to prepare a new regulatory framework for start-ups and alternative investments.

Sanjay Nayar, chief executive officer of KKR India Advisors, Ajay Piramal Chairman, Piramal Group; Devinjit Singh MD, Carlyle Group; Arvind Mathur President, Indian Private Equity & Venture Capital Association, are among the members of the panel.

Between 2001 and 2015, venture capital and private equity funds worth over $103 billion flowed into Indian companies. The money was put in over 3,100 firms across 12 major sectors.

The capital markets regulator has sought comments from the public till February 10 on the report.