India budget promotes start-ups, but leaves GPs waiting

Assistance for Indian start-ups was a major theme of finance minister Arun Jaitley's speech to parliament, presenting the Modi government's final budget before this year's national election. Jaitley acknowledged the role of VC investors in this area. He highlighted the government's actions to encourage investment such as reform of the alternative investment fund (AIF) regime, a category that includes most VC and PE funds, and the introduction of the Start-Up India program.

However, despite pledging that the government "will take additional measures to strengthen the environment for the growth and successful operation of alternative investment funds in India," Jaitley declined to specify what these future measures might be.

Suggestions made by the private equity industry ahead of the budget had included several tax measures, such as restoring tax pass-through status for losses at the fund level (currently pass-through status only applies to gains), reforming taxation of angel investments, and clarifying the tax status for Category III AIFs, which includes hedge funds and PIPE funds. Industry leaders had also asked the government to expand the list of domestic investors permitted to invest in AIFs. None of these proposals were addressed in Jaitley's speech.

One proposal did draw praise from the private equity community following the speech: the call to end long-term capital gains tax exemption for the sale of listed shares and equity mutual funds. These sales will now be taxed at 10%, the same as long-term capital gains on unlisted shares. PE industry representatives expressed hope that this measure would provide tax parity between the two asset classes and create incentives for investment in private equity and venture capital funds.

Many of Jaitley's policy goals were aimed at incentivizing Indian micro, small and medium-sized enterprises (MSMEs). For instance, the government wants to expand the corporate tax reduction announced last year to include companies with reported revenue of less than INR2.5 billion ($39 million), up from the current level of INR500 million. Companies that meet the requirement will see their tax rate reduced from 30% to 25%.

The government also pledged to back innovative avenues for providing financing to MSMEs. Its plans include supporting the development of the financial technology space and revising regulations covering non-banking finance companies (NBFCs), which have become important lenders for MSMEs.

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• Topics
• South Asia
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• India