No venture fund has approached IT department for tax exemption
Moneylife Digital Team 23 March 2011

An RTI query recently, alerted the IT department to the strange fact that no venture fund, which can get tax exemption for earnings, has approached the department for tax clearance

The Income-Tax Department is initiating an investigation to check if venture capital funds (VCF), regulated by the market watchdog, Securities and Exchange Board of India (SEBI), have complied with income-tax regulations mandatory under the law to be able to claim tax exemption as VCFs. I-T department sources have confirmed to Moneylife that an investigation is underway to determine why VCFs have not registered with the IT department.

The IT department was alerted to this issue when a Right to Information (RTI) application was filed, seeking the number of VCFs which have been cleared by the IT department. Surprisingly, while replying to the RTI query, the department discovered that no VCF had sought its clearance so far.

Currently, for the purpose of tax exemption, VCFs have to comply with the income-tax rules under Section 10 (23FA) of the Income-Tax (I-T) Act. Section 10 (23FB) of the I-T Act provides tax exemption for "income from investment in venture capital undertaking."

But it is only after the RTI query that the I-T department woke up and started an investigation into why VCFs registered in India have not taken permission from the tax authorities.

As per the information available on SEBI's website, there are as many as 180 registered venture capital funds and 154 registered foreign venture capital funds in India. At present, venture capital activity in India comes under the purview of different sets of regulations.

The SEBI (Venture Capital Funds) Regulation, 1996, lays down the overall regulatory framework for registration and operations of venture capital funds in India. Overseas venture capital investments are subject to the Government of India Guidelines for Overseas Venture Capital Investment in India dated 20 September 1995.

For tax exemption purposes, venture capital funds also need to comply with Income-Tax Rules under Section 10(23FA) of the Income-Tax Act. However, no venture firm has approached the IT department, according to a senior IT official.

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