PE, VC funds could be treated as separate class of investors

The government is considering recognising private equity (PE) and venture capital (VC) funds as a separate class of investors so that multiple issues faced by these increasingly significant investors and their concerns can be resolved in a comprehensive manner.

Several PE and VC funds have pointed out issues relating to taxation, regulation and processes leading to litigations at various tribunals.

“We are setting up an expert committee in a month or two to look at terms of regulation and processes, and related issues. The idea behind it is that those funds in (unlisted space) and are setting up offices in India require a paradigm shift (in taxation and other regulations), looking at the significant amount they are investing here,” Ajay Seth, secretary at the Department of Economic Affairs, told ET in an interview.

He added that the PE-VC industry has requested a structured discussion on the matter.

The government wants to understand their expectations and concerns, and then come out with a comprehensive way forward rather than provide a solution on one or two issues, Seth said.

• Several PE and VC funds have pointed out issues relating to taxation, regulation and processes leading to litigations
• Govt wants to understand the PE-VC industry’s expectations and concerns
• Expert panel likely to comprise representatives from regulators, tax dept as well as industry stakeholders

“Venture capital and private equity invested more than ₹5.5 lakh crore last year, facilitating one of the largest startup and growth ecosystems,” finance minister Nirmala Sitharaman said in her budget speech on Tuesday, proposing a committee to look into industry demands.

“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 said.

Trust Structures

People in the know said the committee is expected to deliberate over all the issues and see if PE and VC funds could be classified as a separate class of investors like foreign portfolio investors (FPIs). FPIs are regulated by the Securities and Exchange Board of India and invest in the listed space.

The expert panel is likely to comprise representatives from regulators, tax department and industry stakeholders. It would examine how employee stock options by startups and carry fees be treated, an official privy to the plan said. Carry fees is the share of profit or investment that a fund manager gets.

“Of late, there have been multiple challenges both on income tax as well as GST fronts for PE-VC funds and the fund managers, with open litigations on many fronts. Easing out these challenges will allow for faster growth of this sector,” said Bhavin Shah, partner, PwC.

The Customs, Excise & Service Tax Appellate Tribunal, Bengaluru, in a July 2021 order held that service taxes were applicable on expenses incurred by PE-VC funds even under the trust structure. That implies carry fees, legal fees and salaries incurred by a fund that is held in a trust structure would appropriate service tax.