Section 10(23FB) Tax exemption for Alternative Investment Funds – Venture Capital Funds

Issue/Justification

Earlier under Section 10(23FB) of Income-tax Act, any income of a Venture Capital Company (VCC) or Venture Capital Fund (VCF) set up to raise funds for investment was exempt from taxation. However, in 2007, this was amended and the scope of VCC / VCF was narrowed down to select sectors and the exemption from income tax was limited to “any income of a VC company or VC fund from investment in a venture capital undertaking”.

The sectoral restriction stands removed in Union Budget, 2012 which was a welcome move. However, the tax exemption still remains limited to “any income of a VC company or VC fund from investment in a venture capital undertaking”. Keeping in mind the growing importance of VC funds in infrastructure and also in other important sectors of our economy, the previous wording of “set up to raise funds for investment” needs to be restored in place of “from investment” under Section 10(23FB).

A change in the wording from “any income of a VC company or VC fund from investment” to “any income of a VC company or VC fund set up to raise funds for investment” will enable the VCC / VCF to undertake analysis / study necessary to evaluate the project viability as well as to render other services for the projects in which investments are made. Restricting the wording to “any income of a VC company or VC fund from investment” severely restricts the tax exemption
thus affecting the commercial viability of the VCC / VCF.

Suggestion

 It is suggested that section 10(23FB) be reworded as follows:

“Any income of a venture capital company or venture capital fund from investment set up to raise funds for investment in a venture capital undertaking.”

(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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Category : Income Tax (26766)
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Tags : Budget (1951) ICAI (2539)

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