Startup investors celebrate government’s move to bring parity in long-term capital gains tax but say indexation a downer

For the move to positively influence the ecosystem, fund managers said they need their bets to outperform and their return multiples to be higher than what they were earlier.

Investors and the wider startup ecosystem hailed the government’s move to lower long-term capital gains (LTCG) tax from 20 percent to 12.5 percent on assets of unlisted companies while announcing the Union Budget on July 23.

The reduction in LTCG effectively means that gains from sale of shares in unlisted companies, startups in this case, will now be treated at par with listed securities while computing taxes as the government aims to bring parity across different financial assets.

This is especially helpful at a time when access to primary capital has become difficult and activity in the secondaries market is picking up. A host of large tech startups, like Swiggy, Meesho, Lenskart, Purplle have all seen some early investors offload shares to book some profits.

For far too long the differential tax rates have been a cause of concern, leading to investments in listed companies as opposed to unlisted ones. To stop that, a parity in LTCG tax was needed. “Investments in unlisted companies goes into new asset creation, hiring and sales. Aligning the tax rates recognizes this contribution and will result in more funding to Indian startups,” Siddarth Pai, Founding Partner, 3one4 Capital, said while cheering the government’s move.

The removal of indexation however is a cause of concern, Pai and other venture capital investors said.

Navin Honagudi, Founder and Managing Partner, Elev8 Venture Partners said that while from a VC perspective, it may seem that private market investors are now at par with the investors in the listed space, the actual impact will need to be assessed as the indexation benefit has been done away with.

“On a long term and very high returns, the reduction in tax rate might impact positively but if the returns are tapered over a mid to long term, we might be in a slightly disadvantageous situation as inflationary adjustment (indexation) will not be available,” Honagudi said.

For the move to positively influence the ecosystem, fund managers said they need their bets to outperform and their return multiples to be higher than what they were earlier.

“The holding period for unlisted is at 24 months instead of 12 months in case of listed equity - so it’s technically not full parity - but that is alright because we do want to encourage people to remain invested in private companies longer given the nature of liquidity in the private company assets,” said Ashish Kumar, co-founder and general partner at Fundamentum.