A Welcome Parity

Back in 2015, at the India Venture Capital Association (IVCA), we highlighted to the government that there was a significant disparity in capital gains taxes, especially between listed and unlisted exits on the sale of shares. It took a decade and multiple representations to finance ministers, but now this disparity has been fixed in Budget 2024. 
The equalisation of long term capital gains (LTCG) for listed and unlisted sales of shares at 12.5 per cent (plus cess and surcharge) is a significant and positive development for the startup and venture capital industry. This change not only eliminates a long-standing disparity but also ushers in a new era of optimism and potential growth for the industry. 

The LTCG for unlisted shares was 20 per cent minus indexation (plus cess and surcharge), while that for listed shares was 10 per cent with no indexation benefit. Indexation usually did not play a significant role for unlisted shares, as the gains would often be much higher. This thus created a non-market-linked incentive for investors to participate in listed stocks and mutual funds. Further, given that unlisted stocks are less liquid, there was disproportionate favour towards listed equities and mutual funds.

Better Money Flow Seen
With the disparity having been dissolved, it is reasonable to expect a greater flow of money towards startups and venture capital funds. The impact of this cannot be overstated enough. The Indian startup ecosystem is nascent yet deeply undercapitalised and heavily dependent on foreign investors, known to be fickle, who depart India when times are tough or other markets are more attractive. With the disparity having gone away, domestic investors will likely bring in significant flows and create an industry built on domestic capital that has proven to be stable.

Yet another benefit of dissolving this tax disparity is that it should help tame valuations in the listed space, which is trading with price-to-earnings ratios at the richest levels compared to those in other major markets. While this is not linked directly to the startup ecosystem, a healthy listed market is required and is in the overall interest of our nation’s economy.

The other good news was about angel tax, which targeted startups' funding from angel investors. Intended to curb money laundering, it inadvertently hampered genuine startups, taxing the excess over the fair market value of shares. This led to valuation discrepancies, tax scrutiny, cash flow issues, and investor reluctance, ultimately stifling the startup ecosystem.

The government's dissolution of the angel tax in budget 2024 is a strategic move that brings significant benefits. It revitalises the startup landscape, encourages more investments, attracts increased foreign capital, and enhances the ease of doing business. 

These changes, addressing tax disparity and removing the angel tax, clearly demonstrate the government's commitment to nurturing a vibrant startup environment, which is crucial for India’s economic development.