From the Finance Minister’s Union budget speech: “Venture capital funds are a useful source of risk capital, especially for start-up ventures in the knowledge-intensive sectors. Since such funds enjoy a pass-through status, it is necessary to limit the tax benefit to investments made in truly deserving sectors. Accordingly, I propose to grant pass-through status to venture capital funds only in respect of investments in venture capital undertakings in biotechnology; information technology relating to hardware and software development; nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels. In order to promote business tourism, I also propose to allow this benefit to venture capital funds that invest in hotel-cum-convention centres of a certain description and size“

As on date, the VCs have pass through for all the sectors. Pass through would essentially mean that the tax on capital gains on investment is completely passed on to investors, instead of being double taxed at both the VC LP level and the Investor level. Pass-through was essential for all the sectors to foster greater participation of VCs in the Indian economy to increase access to funds for the well deserving entrepreneurs. However, India is at a cross-roads. It can choose to compete as a low cost country or a high innovation quotient country.

Contrary to what most qualified writers have commented on the above, the provisions made by the Finance Minister in his Union budget speech are prudent and show the focus of India on encouraging development in the growth/emerging sectors as mentioned above. While Infrastructure and Real estate are sectors which need a lot more development in India, giving VCs a tax grant for pass through in all the sectors would drive VCs to look for avenues of easy capitalisations rather than focussing on what is good for the economy. The above tax provision by the Finance Minister would now encourage DVCs or FVCs to bring greater technological depth to the Indian market, instead of pure play outsourcing of low end jobs that the previous decade has seen.

My two thumbs up to the Finance Minister for this proposal!

Tags: pass-through, union budget, VC taxes in India

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