Long-term capital gains tax on PE investment cut to 10 per cent

NEW DELHI: The government cut the long-term capital gain tax from 20 per cent to 10 per cent on investments made by private equity funds into shares of unlisted companies.

"In order to give parity to such (private equity) investors, I propose to reduce the rate in their case from 20 per cent to 10 per cent on the same lines as applicable to FIIs," Finance Minister Pranab Mukherjee said in a debate on Finance Bill, 2012, in the Lok Sabha today.

Long-term capital gains arising from sale of unlisted securities in the case of foreign institutional investors (FIIs) are taxed at the rate of 10 per cent, while other non-resident investors, including PE investors, are taxed at the rate of 20 per cent.

After the presentation of Budget for 2012-13, several PE investors had appealed to the Finance Ministry to bring them the tax rate at par with the FIIs.

For listed securities, however, there is no tax on long term capital gains.

Experts, however, said if the tax structure of the PEs is relaxed that would help them exit their investment in India without worrying much on the tax payout and attract more foreign capital.

PE investors usually invest with a longer term, usually 5-8 year horizon, in start-ups and they prefer to exit their holding at the time of listing of the company.

However, volatile stock market conditions are delaying the listing plans of several companies and PEs are now going for private share sale to exit their holding.

Mukherjee, while moving the Finance Bill, 2012, for consideration and passage in the Lok Sabha, also exempted long term capital gains tax on sale of unlisted securities in initial public offerings ( IPO).