India's capital gains tax on unlisted stock is expected to drop to 10 percent from its current 20 percent rate under a new proposal, according to local media reports.
The rate, which is still under consideration, would match that for institutional investors in the country.
The finance ministry’s incentive behind the capital gains tax reduction is to lure foreign GPs to set up shop onshore in India, rather than in its neighbour Mauritius, which does not impose tax on capital gains.
However, Juan Delgado-Moreira, managing director and head of Asia and Europe at Hamilton Lane, thinks this is unlikely to have much effect. “Private equity doesn’t like any tax on capital gains so I don’t see this luring funds to incorporate in India.” On the other hand, he added: “As for Indian individuals [investors and GPs] this is plain good news.”
Foreign private equity firms are also awaiting clarification of Indian government legislation called the General Anti-Avoidance Rule (GAAR), which calls for adjustments to current tax policy on offshore transfers. If GAAR passes into law in its current form, it could subject foreign funds to certain taxes when they sell a stake in Indian portfolio companies.
Clarification of these rules were expected during the third week of April, with the passing of India's 2012 budget. However, the measures still remain uncertain, and as a result private equity firms have held back from deploying capital in India, according to a number of industry sources.
Private equity investment in Q1 2012 was $1.9 billion, down 50 percent from the same period year-on-year, according to data from Venture Intelligence.