The Standing Committee on Finance (2019-20) has recommended to the Centre to abolish tax on Long Term Capital Gains for all investments in startups which are made through collective investment vehicles (CIVs) such as angel funds, alternate investment funds (AIF), and investment LLPs.

The committee in its report on "Financing The Startup Ecosystem" said the tax should be removed at least for the next two years to encourage investments amid the pandemic.

"The Committee would like to strongly recommend that tax on Long Term Capital Gains be abolished for all investments in startup companies (as designated by DPIIT) which are made through collective investment vehicles (CIVs) such as angel funds, AIFs, and investment LLPs," it said.

It suggested that after this 2 year period, the Securities Transaction Tax (STT) may be applied to collective investment vehicles (CIV) so that revenue neutrality is maintained.

Investments by CIVs are transparently done and have to be done at fair market value, the Standing Committee said, adding that it is easy to calculate the STT associated with these investments.

"This can be done in lieu of imposing LTCG on these CIVs and to make the taxation system fairer, less cumbersome, and transparent. This will also ensure that investments in unlisted securities are on par with investments in listed securities," it said.

It has also recommended that there should be no punishing of domestic risk capital at any level, as the current tax disparity is proving advantageous to foreign capital through low tax jurisdictions and low taxes for fund management services.

As per the panel, such a move will establish a level playing field for domestic investments in comparison to foreign investments and domestic listed in comparison to unlisted securities.

The committee recommended that to encourage domestic investments in unlisted debt and equity securities, once the pandemic period concessions are lifted, CIV capital gains should always be taxed at the same rate as listed securities..