The Finance Minister has proposed to set up an expert committee to suggest measures to review the regulatory framework for the venture capital and private equity industry, underlining the maturity of India's startup ecosystem.
"Venture capital and private equity invested more than Rs 5.5 lakh crore last year facilitating one of the largest startup and growth ecosystem," the FM Nirmala Sitharaman said in her budget 2022-23 speech on Tuesday.
"Scaling up this investment requires a holistic examination of regulatory and other frictions. An expert committee will be set up to examine and suggest appropriate measures," she added.
The Finance Minister's proposal comes in the wake of record venture capital deals and unicorn creation besides big-bang initial public offerings (IPOs) of tech startups last year.
Ashish Fafadia, partner at early-stage venture capital firm Blume Ventures, said that the proposal to set up an expert committee to suggest measures to improve the alternative investment fund (AIF) industry is a "massive move"
He noted that the tax system we have at present are keeping in mind some businesses that existed in the 1960s even as reforms like the liberalisation was announced later in the 90s.
However, nothing fundamental had been done keeping in mind the new economy business, he added.
So, the proposal allows the expert committee to go on the ground and create grounds up first principle-based taxation regime to make taxes transparent and holistic, he said.
"I definitely don't see easy solution or big bang solution soon but the good news is that the process has begun. It was a long-standing need of the industry as digital first businesses have become mainstream, I do now see that we will have a framework which will guide future generation," he added.
Pranav Pai, Founding Partner at another early-stage venture capital firm 3one4 Capital, said that venture capital and private equity is a specialist industry and the fact that the government will set up an expert committee means that they are taking it seriously.
"We hope the expert committee will continue its dialogue with the industry and takes us forward," said.
He added that the major immediate asks for the industry would be parity in long term capital gains tax (LTCG) on sale of shares in private companies, allowing Indian AIFs to free up their investment mandate so they can hold crypto tokens, debt instruments and different type of securities as companies go global and reforms in ESOPs (employee stock ownership plan).
The Budget on Tuesday capped the surcharge on long term capital gains at 15%, which reduces the gap between LTCG tax on listed and unlisted securities but does not offer parity.
