India closer to capital gains tax hike

Private equity firms would be directly impacted if a proposal in India’s Parliament to raise the capital gains tax to 30% from 20% is enacted.

A proposal in India's Parliament, the Direct Taxes Code, 2010 (DTC), calls for a uniform tax rate of 30 percent for capital gains on unlisted shares regardless of whether the gains are short or long term, according to Ernst & Young India. 

Last year, the Indian Parliament did not pass the DTC and the government intends to table the decision again in April, Sameer Gupta, tax partner at Ernst & Young in Mumbai, told Private Equity International.

But he doubted the legislative process could move that quickly given all the interests involved.

“It seems ambitious to achieve it this year,” he said. “If they do miss the April deadline, the enactment might be delayed until 2013.”

The private equity industry in India – both domestic and foreign firms – has been petitioning the government. 

“They are asking the government to write in concessions for them because they invest their capital in growth industries,” Gupta said.

If the current proposal is passed, the capital gains tax rate of 30 percent would be the highest among  the BRIC countries, according to Ernst & Young. The capital gains tax rates in Brazil, Russia and China are 15 percent, 15.5 percent, 20 percent and 25 percent respectively. 

Punit Shah, partner, tax & regulatory services at KPMG in Mumbai, believes the proposal will be passed this year without concessions for private equity.

“India probably had the lowest FDI growth among the BRIC countries last year and one of the reasons could be certain tax and regulatory developments, which are perceived negatively by foreign investors,” Shah said.

Despite concerns over potential regulations, some general partners are optimistic about the opportunities in India this year.

“The upcoming year should also see more activity in terms of private equity exits as inflation abates and lower interest rates loosen the purse strings of Indian corporations. This will make transactions and transaction financing more attractive for strategic acquisitions of existing private equity portfolio companies” Parag Saxena, chief executive officer and founder of India-focused New Silk Route, wrote in a recent commentary for Private Equity International.