Deal Street budget expectations: Tax simplification and boost to domestic pools of capital

Dealmakers and investors have some key expectations from the budget this year that would give a lift to deal-making and enhance investor participation.

Rationalisation of capital gains taxation for domestic mergers to bring parity in tax treatment will set the stage for enhanced deal-making. There is a need to provide capital gains exemption for mergers and reorganisations of foreign companies (including companies listed in the GIFT City) that are owned by Indian investors and corporates to allow greater flexibility for acquisitions and overseas listing.

Direct overseas listing has been a key demand from investors, especially in new-age companies, which have huge participation from foreign investors. The ability to list overseas without having to list in India will boost options for companies to go public and can also provide better exit opportunities for existing investors. To boost the startup space and enhance its attractiveness, the industry asks for relaxation of conditions to qualify as a recognised startup with the Department of Promotion of Industry and Internal Trade ('DPIIT').

Deal makers also look to the budget for measures to encourage the Indian IPO market through ease of listing and taxation. There is a need to harmonise capital gains tax rates between residents and non-residents, as well as between the treatment given to shares of listed and unlisted companies, to remove disparity. In another demand, taxation of Employee Stock Ownership Plans (ESOPs) at the time of the sale of shares instead of the issue of shares is required.

“More action to strengthen the capital markets for the listing of start-ups which are high-risk, high-growth companies, is on the wish list. Creating crowdfunding platforms, such as the social stock exchange that is already being considered, and promoting investments in incubation centres, jointly run by industry experts and academia, to transform and fund budding ideas into sustainable businesses of the future,” said Raja Lahiri, Partner at Grant Thornton Bharat.

Industry body, the IVC Association, has placed a request with the Finance Minister for support on the recent RBI circular on 'Investments in Alternative Investment Funds (AIFs). The RBI circular imposes restrictions on Regulated Entities' (REs) investments in AIFs. This regulatory change, coupled with SEBI's increased oversight, has a far-reaching impact on both REs and AIFs and potentially affects domestically managed capital formation.

To boost domestic pools of capital, a clarification on the excuse clause by insurance companies to invest in AIFs and a similar clarification for the excuse clause enabling pension funds to invest in AIFs are sought by the industry. Another ask is to treat management fees as a cost of investment, and consideration is needed to recognising management fees in a fund as a legitimate cost of investment.

Rationalisation of capital gains taxation for domestic mergers

Encourage the Indian IPO market through ease of listings and taxation

Relook at direct overseas listings for Indian companies to list overseas

Enable and boost domestic capital in private equity and venture capital

Uniform taxation rate for all securities, listed and unlisted for domestic investors

Taxation of ESOPs at the time of sale of shares instead of issue

Treatment of management fees as a cost of investment

Relaxation of conditions to qualify as a recognized startup with ‘DPIIT’

Support for the RBI Circular on Investments in AIFs