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Sashi Reddi

Sashi Reddi is Managing Partner of SRI Capital, an early stage venture capital fund.

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No Need to Fear the Public Markets

If there is one category of investor that adds real value to the economy, it is the investor in private equity.

India is one of the only countries in the world with ZERO long term capital gains. No one has ever been able to articulate why this makes sense when the government is yearning for more income to fulfill its promises to its poor citizens. The common refrain is that the public markets will crash and we will be plunged into a depression. That is pure nonsense.

A government that could boldly attempt a radical experiment like demonetization can surely do the following rather obvious fixes to a flawed system:

  • Impose a long term capital gains tax of 10% on public equity: Zero tax just does not make sense. For comparison, the LTCG tax in the US is 24% and the public markets there are doing just fine. Recent media reports talked about a plan to extend the definition of long term to three years instead of the current 12 months. That is a bad idea and an attempt at not making a real decision. Every source of income must be taxed and we do tax everything else. No one can explain the logic of not taxing gains from public equity. And a rate of 10% would still make Indian public markets one of the most investor friendly in the world
  • There should be no difference between public equity and private equity: If there is one category of investor that adds real value to the economy, it is the investor in private equity. Many of us fund startups that are at a very early stage. This is a high risk activity since many of these startups will fail and investors lose all of their money. However, the Indian tax system has its harshest tax laws for investors in startups. This again makes no sense. These are the investments we need to encourage if we want India to be a startup nation and find a way to create millions of jobs every year. Taxation for public equity cannot be given a preferential treatment to private equity, when the economic benefit to society is just the opposite
  • Tax dividends in the hands of the receiver and not the company: Here again, India’s approach to taxing dividends is outside global norms. Dividends are just another form of income to the recipients and should be taxed as such based on their tax bracket. Taxing these at the company level creates an aberration when the government sets its tax brackets and tax rates
  • Death to the angel tax: If there is one law that jumps out as specifically designed to destroy the startup ecosystem, it is the angel tax. When an investor puts money into a startup, tax authorities are insisting on treating that as income and taxing it at the full income tax rate of 30.9%. So angel investors who are deploying their hard earned cash to back risky startups are being punished while stock market operators enjoy benefits for backing large, stable companies! Once again, a perverse law that has no parallel anywhere else in the world

These are relatively simple fixes to the tax code and long overdue. As Prime Minister Modi continues his historic cleanup of the Indian economy and political system, this is just another step in that direction. Let’s get it done in 2018!

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house


Tags assigned to this article:
Public Markets Union Budget 2018-19

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