“Pass-through status to be granted to VCF only in respect of investments in VCU in biotechnology; information technology relating to hardware and software development; nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels, and hotel-cum-convention centers of a certain description and size.”

Section 10(23FB) of the Income Tax Act, 1961 (“IT Act”) provides that any income of Venture Capital Company “VCC” or VCF set up to raise funds for investment in a Venture Capital Undertaking “VCU” shall not be included in computing the total income of the previous year of such VCC or VCF, (This is referred to as pass through tax benefit)

The proposal under budget will be effected by amending the definition of VCU.

Presently under IT Act VCU is defined [clause (c) of Explanation 1 of Section 10(23FB)] same as under SEBI regulations. According to SEBI (VCF) Regulations, 1997, VCU means, a domestic unlisted company, which is engaged in the business for providing services, production or manufacture of article or things or does not include such activities or sectors which are specified in the negative list of SEBI regulations.

As per the proposal, after amendment the definition of a "venture capital undertaking" would mean a domestic unlisted company which is engaged in the business of:

1. nanotechnology
2. information technology relating to hardware and software development
3. seed research and development
4. bio-technology
5. research and development of new chemical entities in the pharmaceutical sector
6. diary industry
7. poultry industry
8. production of bio-fuels
9. hotel-cum-convention centers of a certain description and size

The exact definition is awaited.

This would mean that under IT Act, tax pass through benefits to VCFs / FVCI registered with SEBI, will be available only for the investments made in the above mentioned sectors and not for any other sector.

Pursuant to Section 90(2) of the IT Act, a non-resident assessee based in a country with which India has a Double Taxation Avoidance Agreement (DTAA) may choose to be taxed either under the provisions of IT Act or DTAA, whichever is more beneficial to the assessee.

FVCIs incorporated outside India such as Mauritius may still avail tax benefits under the DTAA between Mauritius & India and the proposed amendment may have limited impact on FVCIs. However if they opt to be taxed under DTAA then they cannot have permanent establishment in India. The impact on domestic VCFs will be more because they are taxed under the IT Act.