Venture Capital Fund Investors Lost Tax Benefits !

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The Finance Bill 2012-13 has a bad news for investors of Venture Capital Funds .The income accrued , although not received by investors , will be taxed in the year of accrual itself whether or not the investor received it. Thus the  provisions of section 115U of Income Tax Act which currently allow an opportunity of indefinite deferral of taxation in the hands of investor is now being amended from  01/04/2012 ( Assessment Year 2013-14 )  so as   to provide that income accruing to VCF/ VCC shall be taxable in the hands of investor on accrual basis with no deferral.

The government is also considering to put a TDS mechanism fbudgetVentureor income in hand of investor as the memorandum to Finance Bill 2012-13 has these words “The exemption from applicability of TDS provisions on income credited or paid by VCF/ VCC to investors shall be withdrawn.” The word shall be is important to understand the intention of the government.

Proposed sec. 115U  for taxing the income of investor in Venture Capital Funds.

[ Brinjal Colour shows the amendment proposed in section 115U ]

Tax on income in certain cases.

115U. (1) Notwithstanding anything contained in any other provisions of this Act, any income accruing or arising to or received by a person out of investments made in a venture capital company or venture capital fund shall be chargeable to income-tax in the same manner as if it were the income income accruing or arising to or received  by such person had he made investments directly in the venture capital undertaking.

(2) The person responsible for crediting or making  payment of the income on behalf of a venture capital company or a venture capital fund and the venture capital company or venture capital fund shall furnish, within such time as may be prescribed, to the   to the person who is liable to tax in respect of such income  and to the prescribed income-tax authority, a statement in the prescribed form and verified in the prescribed manner, giving details of the nature of the income paid or creditedduring the previous year and such other relevant details as may be prescribed.

(3) The  income paid or credited by the venture capital company and the venture capital fund shall be deemed to be of the same nature and in the same proportion in the hands of the the person referred to in sub-section (1) as it had been  received by, or  had accrued or arisen  to, the venture capital company or the venture capital fund, as the case may be, during the previous year.

(4) “(4) The income accruing or arising to or received by the venture capital company or venture capital fund, during a previous year, from investments made in venture capital undertaking if  not paid or credited to the person referred to in sub-section (1), shall be deemed to have been  credited to the account of the said person on the last day of the previous year in the same proportion in which such person would have been entitled to receive the income had it been  paid in the previous year.”;

“Explanation 2.—For the removal of doubts, it is hereby declared that any income which has been included in total income of the person referred to in sub-section (1) in a previous  year, on account of it having accrued or arisen in the said previous year, shall not be included  in the total income of such person in the previous year in which such income is actually paid to him by the venture capital company or the venture capital fund.”.

The move by government will certainly affect the investors of Venture Capital Fund and therefore upcoming ventures  .