Union Budget gives VC firms the jitters over tax norms

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New Delhi: The already vexed venture capital (VC) sector is heading to receive another jolt as the government plans to bring overseas M&As involving Indian companies under the tax net with retrospective effect from June 1976. The industry, especially domestic VCs, have been in a limbo since Budget 2007 when pass-through status was granted only to investments in specific IT and biotech areas, reports The Economic Times. "Taxing M&As will be a retrograde step. We should behave like a developed economy. The government should also restore the pass-through status as it does not make any difference to tax authorities," said Saurabh Srivsatava President, TiE Delhi, a not-for-profit organization focused on promoting entrepreneurship. The companies are also concerned about the government sealing loopholes in the Mauritius Double Taxation Avoidance Act (DTAA) as major firms like Canaan, Helion, Clearstone, Sequioa are using the Mauritius route to invest in India. Estimates indicate that VC firms have invested about $900 million through this route till last year. The new treaties have built in clauses to prevent illegal routing to save tax. "We welcome laws to prevent illegal transactions but any tinkering with the DTAA with Mauritius, Singapore or Cayman Islands will bring down investments by as much as 30 to 50 percent," says Clearstone Venture Partners' Sumant Mandal. The firm has large pension funds and some U.S. states as its investors. It has set aside about $100 million for India and has already invested in four companies. Other major VCs registered in Mauritius are Americorp Ventures, First Carlyle, General Atlantic Mauritius, WestBridge Ventures, Intel Capital, Citigroup Venture Capital, Bessemer Venture Partners, Norwest Venture Partners, Blackstone, NEA-IndoU.S. and Oak India. Canaan Partners' Alok Mittal says, "It is good to check round tripping of investments but any adverse change in the treaty will be a dampener. On the infrastructure side, it can take some positive steps like opening up government tenders to start-ups, unbundling the BSNL local loop and giving boost to broadband penetration. The government should also start partnering with start-ups to carry out R&D."

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