Section 115U provides that income, in the hands of the investor through VCF / VCC is taxed in like manner and to the same extent as if the investment was directly made by investor in the VCU. Further, TDS provisions are not applicable to any payment made by the VCF to its investor and payment by VCC to the investors is exempted from Dividend Distribution Tax (DDT). Effectively, Section 115U provides a ‘pass through’ mechanism whereby the investor is not taxed in separately in the hands of the VCC / VCF.

It is proposed to amend the Section 10(23FB) by removing the sectoral restrictions in which VCU is required to carry on its business. The venture capital undertaking shall have same meaning as provided in relevant SEBI regulations and there would be no sectoral restrictions. Therefore, it is proposed that income of eligible VCUs carrying on activities other than the ones currently specified under section 10(23FB) will not be taxable.

It is proposed to amend section 115U to provide that –

1. Income accruing to VCC / VCF shall be taxable in the hands of investor on accrual basis with no deferral. Currently, income is taxed in the hands of the investor on receipt basis and not on accrual basis.
2. The exemption from applicability of TDS provisions on income credited or paid by VCF / VCC to investors shall be withdrawn.

This proposal is proposed to be effective from the 1^st day of April, 2012 for AY 2013-14 and subsequent years.

  Doing away with the restrictions on areas of business of VCU would help in attracting the VC investments in various sectors which are in the need of funding.

Amendments in section 115U are aimed at preventing deferral of tax by taking income in the hands of investors on accrual basis which will now be subject to TDS as may be applicable.

** VCF: Venture Capital Fund

VCU: Venture Capital Undertaking

VCC: Venture Capital Company