Bengaluru: A complex unfriendly capital gains tax system is a big reason why many Indian start-ups have relocated their headquarters outside India, according to a report on direct tax administration brought out by Bangalore Chamber of Industry & Commerce (BCIC.)

India has seen seminal reforms in capital markets over the last decade. Our secondary markets are in the top three on trading volume, regulations, liquidity and risk management. The big challenge is to improve access to capital for our innovators and start-ups. Only 10% of capital invested in start-ups between 2014 and 2020 is from India, says TV Mohandas Pai, chairman at Aarin Capital Partners, in his foreword.

“We have a perverse tax system that penalizes investing in unlisted companies with a higher long term capital gains tax for taking greater risks and creating more jobs,” he notes.

“There is an urgent need to reform the entire gamut of capital gains tax on securities and real assets in order to simplify the tax regime, ensure uniformity across asset classes, improve compliance, and reduce litigation. Reforms of taxation of capital gains would enable investors to invest in various assets after considering the risk and return rather than tax consequences,” he says.

In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. India today stands at a juncture when quick recovery of the economy after the Covid-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment, the foreword says.

The report is authored by BCIC president KR Sekar and his colleagues at Deloitte Priya Narayanan & Chandrashekara Acharya on measures for prevention of disputes and suggestions for improving faceless assessment and by TV Mohandas Pai and tax consultant S Krishnan on suggestions for improvement of capital gains tax regime in India.

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The report notes that income tax authorities often send notices to companies making vague allegations like making bogus purchases or custom duty paid being less than the export-import data, and not replying at all when the company concerned seeks basis for making such an allegation to file a counter. The authorities seek voluminous details which are totally uncalled for.

By citing this, the BCIC report has recommended that the “assessing officer assigned to a case be adequately trained and have some basic knowledge of the industry or business of the taxpayer.”

The report says since the tax rates for domestic companies has been reduced to 22% (excluding surcharge and cess), deductions available under the law could be removed to implement a simplified tax regime.

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