Chidambaram proposes to allow venture funds that invest in sunrise sectors like IT, biotechnology, nano-technology, and research on new chemical entities to pass their tax burden to their investors.
It could also lead to confusion among investors who put their money in funds that have not been specified, such as real estate funds.
Although VCs say the move was aimed at channelising more funds to high-growth sectors, private equity funds in the real estate segment, one of the most lucrative sectors in India now, are definitely out of favour with the finance minister.
The Budget would allow VCs in the specified sectors to enjoy a structure of taxation (pass-through) where the fund will not be taxed for the income it generates but its investors would be taxed when they receive income from the fund.
In case of funds invested in non-specified sectors, depending upon the structure, even the fund could be taxed when it receives income, an industry official says.