2007 Budget Implication on VC

Prior to the budget, the entire income of registered VC Funds (VCF) and Venture Capital Companies (VCC), whether foreign or domestic, was exempt from Indian income tax, subject to certain conditions. Instead, the income was taxed in the hands of its investors at the time of distribution. However as per the The Finance Bill, 2007 the pass through status for VCF/ VCC would be restricted to only income from investment in domestic unlisted company (VCC) engaged in certain specified businesses such as IT, bio-tech etc . This provision would apply to even the existing non-VCU investments already made by VCFs.

The Finance Bill is therefore seen as a roadblock for other sectors such as Infrastructure/ real estate development from attracting venture funds.

Also from the taxation perspective, VCFs being in the the nature of a Trust vehicle, the taxation would now be guided by the complex principles relating to trust taxation. Whilst this taxation regime for Trusts also aims at one-level taxation, there are several issues which would need to be addressed – characterization as business income or capital gains, taxation on accrual basis rather than on distribution to investors, tax treaty benefits.

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