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Income Tax Laws – I

Notes At present, the Venture Capital activity in India comes under the purview of different sets of
regulations namely:
1. The SEBI (Venture Capital Funds) Regulation, 1996[Regulations] lays down the overall
regulatory framework for registration and operations of venture capital funds in India.
2. Overseas venture capital investments are subject to the Government of India Guidelines
for Overseas Venture Capital Investment in India dated September 20, 1995.
3. For tax exemptions purposes venture capital funds also needs to comply with the Income
Tax Rules made under Section 10(23FA) of the Income Tax Act.

In addition to the above, offshore funds also require FIPB/RBI approval for investment in
domestic funds as well as in Venture Capital Undertakings (VCU). Domestic funds with offshore
contributions also require RBI approval for the pricing of securities to be purchased in VCU
likewise, at the time of disinvestment, RBI approval is required for the pricing of the securities.
The provisions of Chapter XII-D or Chapter XII-E or Chapter XVII-B shall not apply to the
income paid by a venture capital company or venture capital fund under this Chapter.
Thus taking from the perspective of taxation of income in India you can say that the Venture
Capital Undertaking (VCU) is defined under Section 10(23FB) of the Income Tax Act to cover
unlisted companies. As per SEBI regulations, a VCU means a domestic unlisted company which
is engaged in the business for providing services, production or manufacture of article or things.
The company must not belong to such sectors which are specified in the negative list by the
Board with the approval of the Central Government by notification in the Official Gazette in this
behalf i.e. NBFCs, Gold Financing, etc.

Any amount of income distributed by a venture capital company or venture capital fund to the
investors shall be chargeable to tax and such company or fund shall be liable to pay income-tax
on such distributed income at the rate of twenty per cent. A venture capital company or venture
capital fund shall be liable to pay income-tax at the rate of twenty per cent on any income which
is not distributed to the investors within such time as may be specified, with the approval of the
Central Government, by the Securities and Exchange Board of India, by notification in the
Official Gazette, in this behalf.
The person responsible for making payment of the income distributed by the venture capital
company or venture capital fund and the Venture Capital Company or venture capital fund
shall be liable to pay tax to the credit of the Central Government within fourteen days from the
date of distribution or payment of such income, whichever is earlier.

Clause 108 related to tax on income received from Venture Capital Company and venture
capital fund states that any income 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 received by such person had he made investments directly in the venture
capital undertaking.
The venture capital company, the venture capital fund or the person responsible for making
payment of the income on behalf of such company or fund shall furnish, within such time as may
be prescribed, to the person receiving such income and to the prescribed income-tax authority,
a statement in the prescribed form and manner, giving details of the nature of the income paid
during the financial year and such other relevant details as may be prescribed.
The income paid 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 person receiving such
income as it had been received by, or had accrued to, the venture capital company or the venture
capital fund, as the case may be, during the financial year.

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