The venture capital sector is jittery as Budget 2008 draws near. VCs, especially the domestic ones, were in a state of lethargy since Budget 2007, when ‘pass through’ status was granted only to investments in specific IT and biotech areas. And the plan to bring overseas M&As involving Indian companies under the tax net, that too with retrospective effect from June 1976, is making them even more worried.
“Taxing M&As will be a very retrograde step. The world now sees us as a developed economy and we should behave in that manner. It will be totally unfair to tax M&As, that too in retrospect,” says president of TiE Delhi Saurabh Srivsatava. “The government should also restore the pass through status as it was earlier, as it does not make any material difference to tax authorities. But, for the industry, it’s making a complete mess,” he adds.
Another thing worrying the VCs is the government’s move to ‘plug loopholes’ in the Mauritius DTAA (Double Taxation Avoidance Act) because all their acquisitions/investments in India are routed through Mauritius. Many major VCs, like Canaan, Helion, Clearstone and Sequioa, invest in India through routes like Mauritius. According to estimates, VCs invested about $900 million through this route till last year. Other tax havens with which India has a treaty are Cayman Islands, Singapore and more recently Luxembourg.
“Any tinkering with the DTAAs with Mauritius, Singapore or Cayman Islands will bring down investments by as much as 30-50%. We welcome laws to prevent illegal transactions, but any tinkering with the treaty will kill the growth of the industry,” says Sumant Mandal of Clearstone Venture Partners, which has large pension funds and American states like Michigan as its investors. The $700-million VC firm has set aside about $100 million for India. It has already invested in four companies here.
Generally, VCs invest in Indian companies through their Mauritius subsidiaries rather than from US. The tax avoidance treaty with Mauritius ensures that their investments in India are not taxed. On its part, Mauritius does not levy a capital gains tax.
The gains made are then routed to the US where they have to pay a tax. Other major VCs registered in Mauritius are Americorp Ventures, First Carlyle, General Atlantic Mauritius, WestBridge Ventures, Intel Capital, Citigroup Venture Capital, Bessemer Venture Partners, Norwest Venture Partners, Blackstone, NEA-IndoUS and Oak India.
India has treaties with almost 70 countries. The new treaties have built-in clauses to prevent illegal routing to save tax.
Adds Alok Mittal of the Mauritius-based Canaan Partners: “It’s good to check round tripping of investments, but any adverse change will be a dampener. On the infrastructure side, it can take some positive steps like opening up government tenders to startups, unbundling the BSNL local loop and giving boost to broadband penetration. The government should also start partnering with startups to carry out R&D.” VCs also want incentives.
“In the US, VCs get tax rebates for investing above a certain amount. In India, the government should encourage investors like this. Or else, the liquid money gets invested in real estate, which increases land prices without fuelling the economy,” adds Mr Srivastava.
VCs are also demanding a rationalisation of FBT on ESOPs as they feel it hinders bringing in new talent in startups. Clearly, the VC industry is waiting with their fingers crossed.
Source: Economic Times