I recall a conversation with Alok on this topic, on the day the budget was presented. The Economic Times has an article today that outlines the issue, but presents no clear resolution one way or another. Would some of the knowledgable folks here comment?
The worst isn’t over for venture capital funds (VCFs). The million-dollar question before funds now is the rate at which their earnings will be taxed. Will it be 10% that stock investors pay on “capital gains” or, will the IT assessing officer use his discretion and treat the earnings as “business income” and slap a 30% tax?
There is no straight answer to this: while one may argue that VCFs buy stocks with the clear purpose to invest and hold on for a few years, it is also perceived that trusts are set up for the “business of investment” and hence what they earn is business income.
More so, since VCFs invest in unlisted stocks, where long-term gains are also taxed. A 30% tax could deal a body blow to VCFs, making them significantly less attractive as invesment vehicles. The tricky issue has cropped up even as funds are finding it difficult to come to terms with the new proposal that brings most VCFs under the tax net.
- Mary Meeker’s 2014 Internet Trends report - May 28, 2014
- Andreessen-Horowitz raises $1.5B for its new fund - February 1, 2012
- WestBridge launches India “evergreen” fund - November 15, 2011
Difference in interpretation was not on `categorization’ –
To jog your recall, it began with you saying in your comment dt. April 2nd – *This distinction is fundamental to your argument that VCs were begining to act more like PEs and hence should be subject to income tax instead of capital gains tax. Given that distinction itself does not exist, I am not sure if the remainder of your argument is valid.*
By acknowledging the existence of categorization ( at least had there been no difference, why two labels ? ), do you come round to agreeing that the difference does exist between PE & VC ?
In which case, my argument has been valid from day 1.
In case you missed it,
Quoting from wikepedia: “Categories of private equity investment include leveraged buyout, venture capital, growth capital, angel investing, mezzanine capital and others. Private equity funds typically control management of the companies in which they invest, and often bring in new management teams that focus on making the company more valuable.”
That is very different from you defintion of PE (speculative, leaning more towards pureplay fund management). Further, VC is a sub-category of PE, not different from PE, as you refer to above.
I brought in mutual funds because you referred to Alliance Capital, which is a mutual fund.
Now you are introducing *mutual funds* which was not part of the original discussion.
In a desperate attempt to drive home the distinction between PE ( speculative, leaning more towards pureplay fund management) and VC ( more strategic, incubatory, driven by ex-entrepreneurs and less speculative ) you’ve attached links which have little or no relevance.
Take good care.