Budget 2023: Jayant Sinha bats for parity in capital gains tax rules to help start-ups, private markets

Budget 2023-24 could see some changes in capital gains tax as the government is considering a long-standing demand to bring in parity in rates and rules between the public and private markets.

“We have a very good sort of capital gains regime when it comes to the public markets. In the public markets if your holding period is relatively short, just a year, you have a pretty low capital gains tax rate, which is not the case for private markets,” Jayant Sinha, Chair of the Parliamentary Standing Committee on Finance and a former Union minister of state for finance, told Moneycontrol in an exclusive interview.

Unlike the public markets, long-term holdings in private markets, which refer to investments in equity and debt of privately owned companies, have to pay a higher capital gains tax.

The Parliamentary Standing Committee on Finance has recommended that the Budget should simplify and streamline capital gains tax rules across equity, debt, real estate, gold and mutual funds.

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For an angel investor in a startup, holding periods are much longer such as three years and they have to pay a higher capital gains tax rate, he said.

“So I think there we should do an adjustment so that they are on the same level playing field, and so that our startups can get more capital, particularly from high net worth individuals, from angel investors, and then they can receive the benefits of that money coming in, because the startup ecosystem is a great strength and great joy,” Sinha said.

Simplify rules

There is a call from stakeholders to simplify the rules –including different holding periods, tax rates, tax breaks, indexation, unequal incentives, etc.

Within the government, there is a realisation of the need to levelise capital gains tax—especially for investments in private markets and the government is considering “some equalisation”.

“For investments in the private markets, even if you are investing through a fund and so on, like an AIF (Alternate Investment Fund), you are still paying these higher tax rates. I think that can be adjusted. In fact, in our committee, we had proposed that just like mutual funds get lower capital gains tax rates, if you are investing through an AIF, for example, which is also well regulated and has high standards of disclosure and compliance, then you could have the same kind of taxes that you get when you invest in mutual funds,” Sinha told Moneycontrol.

There is also a recommendation to allow AIFs to list on the stock exchanges as well to enable more domestic capital to invest in start-ups.

The tax maze

Currently, there are different periods for the classification of assets into short term and long term depending on asset classes. The differential adds to complexities for investors in calculating capital gains in cases where they hold multiple classes of assets. The rationalisation of holding periods of different types of capital assets has been a long-standing demand of the industry. There are multiple tax rates for different types of capital assets – capital gains tax on the sale of listed shares is 10-15 percent; for unlisted shares, it is 40 percent. Foreign investors are subject to different rates of surcharge – the rate of surcharge for a foreign individual or funds is 15 percent while for a foreign company, it is 5 percent.

A task force headed by former Central Board of Direct Taxes member Akhilesh Ranjan had suggested a long-term capital gains tax of 10 percent for gains on the sale of equity assets held for more than 12 months and 15 percent for equities held for a shorter period. Currently, long-term capital gains tax is 20 per cent; in the case of equities it is 10 per cent; short-term capital gains tax for equities and related assets is 15 percent.