Finance ministry may cut capital gains tax on PE investments

In order to attract foreign capital, the finance ministry may cut long-term capital gain tax from 20% to 10% on investments made by private equity funds into shares of unlisted companies.

In order to attract foreign capital, the finance ministry may cut long-term capital gain tax from 20% to 10% on investments made by private equity funds into shares of unlisted companies.

Several PE investors have appealed to the ministry to bring them at par with the Foreign Institutional Investors (FIIs) as far as tax treatment is concerned.

"For PEs investing in unlisted securities currently they are charged higher rate of tax than FIIs. So they have requested to being them at par with FIIs. Let us see," finance secretary RS Gujral said.

As per the provisions of the Finance Bill 2012, while FIIs pay a long-term capital gain tax of 10% for investment in unlisted securities, private equity (PE) investors pay 20%.

For listed securities, however, there is no tax on long term capital gains.

Experts, however, said if the tax structure of the PEs is relaxed that would help them exit their investment in India without worrying much on the tax payout.

PE investors usually invest with a longer term, usually 5-8 year horizon, in start-ups and they prefer to exit their holding at the time of listing of the company.

However, volatile stock market conditions are delaying the listing plans of several companies and PEs are now going for private share sale to exit their holding.

The government has been taking steps to attract foreign capital both as foreign direct investment (FDI) and portfolio investment. These issues have assumed importance in view of the global financial problems which are impacting investments into the country.