Tax benefits on VC, startups' minds as Budget 2025 nears

Startups and venture capital (VC) firms are advocating for a more favorable tax regime and initiatives to enhance the availability of domestic capital in the forthcoming Budget, ToI reported on January 18. Siddarth Pai, founding partner at 3one4 Capital and co-chair of the regulatory affairs committee at the Indian Venture and Alternate Capital Association (IVCA), told ToI's Asmita Dey that it was necessary to have for tax parity between foreign and domestic funds to attract foreign investors to Indian alternative investment funds (AIFs).

"If foreign investors observe that foreign funds benefit from superior tax treatment in India, they are likely to opt for these foreign vehicles rather than Indian AIFs. Achieving this parity will also draw investors and fund managers to GIFT IFSC," Pai told the newspaper.

Padmaja Ruparel, co-founder at the Indian Angel Network (IAN), suggested that insurance companies, banks, and pension funds should be incentivised to invest alongside the government through fund of funds schemes to stimulate the growth of AIFs. "This would facilitate the expansion of domestic capital for startups," Ruparel noted.

It may be noted here that AIFs serve as pooled investment vehicles targeting assets like startups. Current regulations restrict insurance companies and pension funds from investing directly in startups; they can only do so through fund of funds that are permitted to invest in AIFs.

Anirudh A Damani, managing partner at ArthaVenture Fund, highlighted the need for a sovereign-backed fund of funds anchored by SIDBI, which would enable contributions from banks, insurance companies, and global sovereign wealth funds. Damani stated, "With SIDBI as the anchor, this strategy will establish a crucial pool of patient capital serving startups at various stages," further advocating for an expanded definition of startups to facilitate broader business support.

The existing DPIIT startup classification limits eligibility to companies that are up to 10 years old or have a turnover of less than Rs 100 crore.

Additionally, startups are requesting a relaxation of the tax regime concerning employee stock ownership plans (Esops). Mayank Kumar, co-founder at upGrad, argued that treating Esops similarly to shares with more straightforward tax structures would transform them into an effective wealth-creation tool, aiding startups in retaining and attracting top talent.