SME POLICY SERIES 2 : SME Exchanges in India - Federation of ...

AnnexureTax benefits to VCF / VCC and Alternative Investment (SME) Funds – Category-I arising out of Sec. 10(23FB) of Income TaxAct, 1961 read with SEBI (Alternative Investment Funds) Regulations, 2012Any income of a Venture Capital Company (VCC) or Venture Capital Fund (VCF) from investment in a Venture Capital Undertaking(VCU) is exempt from income tax. Eligible VCC, VCF and VCU are defined in SEBI (Venture Capital Fund) Regulations, 1996, whichhave since been rescinded after notification of SEBI (Alternative Investment Funds) Regulations, 2012. VCU are entities which are notlisted and which do not fall in the negative list of SEBI and GOI. With SEBI (Alternative Investment Funds) Regulations, 2012, the scopeof income tax benefits have been enlarged to include Alternative Investment Funds registered as Category I SME funds (i.e. whereinvestments made in SMEs as defined under MSME Development Act, 2006, exceeds 75% of the fund size) by including such fundswithin the meaning of VCF or VCC eligible for exemption under Sec. 10(23FB) of the IT Act, 1961.Excerpts of law relating to Securities Transaction Tax - Even income arising out of divestment on initial public offer made by anyinvestor (including offers made by VCC or VCF) is exempt from tax if the income is in the nature of long term capital gains providedSecurities Transaction Tax (STT) has been paid at 0.2%. If the gain is in the nature of short term, on payment of STT @ 0.2%, theapplicable tax on the short term capital gain would be flat 10%. The income has to arise of investment transactions. In other words,income in nature of dividend on equity of preference shares, short term or long term capital gains, are exempt from payment ofincome tax under Sec. 10(23FB) of IT Act, 1961. Any other income or gain in the nature of fees, royalties, etc. would be exempt from ITAct, 1961, provided the same is arising of the investment covenants of the VCC or VCF in the VCU.SEBI (Venture Capital Funds) Regulations, 1996 (since rescinded but existing VCF would continue to be governed under theregulation ill the closure of the VCF; no additional funds can be raised or scheme launched under except under SEBI (AlternativeInvestment Funds) Regulations, 2012)Sec 2(n) define “venture capital undertaking” as a domestic company—(i) whose shares are not listed on a recognized stock exchange in India;(ii) which is engaged in the business for providing services, production or manufacture of article or things or does not includesuch activities or sectors which are specified in the negative list by the Board with the approval of the Central Government bynotification in the Official Gazette in this behalf.SEBI (Alternative Investment Funds) Regulations, 2012 - DefinitionsSec. 2(1)(o) defines “investee company” as any company, special purpose vehicle or limited liability partnership or body corporatein which an Alternative Investment Fund makes an investment;Sec. 2(1)(s) defines “SME” as Small and Medium Enterprise and shall have the same meaning as assigned to it under the Micro,Small and Medium Enterprises Development Act 2006 as amended from time to time;Sec. 2(1)(t) defines “SME fund” means an Alternative Investment Fund which invests primarily in unlisted securities of investeecompanies which are SMEs or securities of those SMEs which are listed or proposed to be listed on a SME exchange or SME segment ofan exchange;Sec. 2(1)(z) defines “venture capital fund” means an Alternative Investment Fund which invests primarily in unlisted securities ofstart-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology orintellectual property right based activities or a new business model;Sec. 2(1)(aa) defines “venture capital undertaking” means a domestic company:(i) which is not listed on a recognised stock exchange in India at the time of making investment; and(ii) which is engaged in the business for providing services, production or manufacture of article or things and does not includefollowing activities or sectors:(1) non-banking financial companies;(2) gold financing;(3) activities not permitted under industrial policy of Government of India;(4) any other activity which may be specified by the Board in consultation with Government of India from time to time;Sec. 3(4) Alternative Investment Funds shall seek registration in one of the categories mentioned hereunder and in case ofCategory I Alternative Investment Fund, in one of the subcategories thereof:(a) “Category I Alternative Investment Fund” which invests in start-up or early stage ventures or social ventures or SMEs orinfrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable andshall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other AlternativeInvestment Funds as may be specified;Explanation ─ For the purpose of this clause, Alternative Investment Funds which are generally perceived to have positive spillovereffects on economy and for which the Board or Government of India or other regulators in India might consider providingincentives or concessions shall be included and such funds which are formed as trusts or companies shall be construed as “venturecapital company” or “venture capitalfund” as specified under sub-section (23FB) of Section 10 of the Income Tax Act, 1961.Securities transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges. Securities Transaction Tax isapplicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity oriented Mutual Funds. In other words,the same is not applicable on preference shares or debentures or any other securities other than equity. Current STT on purchase orsell of an equity share is 0.075%. If STT has been paid at the time of selling securities (shares), the law relating to Income Tax is:FOR INVESTORS -(1) Shares are sold after 12 months, it comes under long term capital gains no tax ispayable on that gain.(2) Shares are sold before 12 months, it is a short term capital gains and Income Tax @10% flat is payable on the gain.FOR TRADERS –All gains are treated as trading (Business) and tax is payable as per appropriate tax slabs. However, STT paid on transactions can beclaimed as a deductible expense.STT on IPO and benefits in payment of Income Tax :Benefit of capital gains tax exemption has been extended to sale of unlisted securities in an initial public offering. However, a securitiestransaction tax at the rate of 0.2 % will be payable on such a transaction.7