Venture Capital Fund Taxation Simplified !

Venture Capital Fund or VCF is fund formed by various investors for certain basic purpose. VCFs are constituted as TRUST where the trust deed lays down exact contribution of each member in the corpus. The management of the fund is assigned to a separate entity called Asset Management Company.

Who regulates Venture Capital Fund or Venture Capital Company?

Securities and Exchange Board of India regulates the Venture Capital Fund by its regulation called Securities
and Exchange Board of India (Venture Capital Funds) Regulations, 1992 (SEBI Guidelines) .

Which provisions under I. T. Act related to taxation of Venture Capital Fund?

Section 10(23FB) of the I.T.Act  exemption from tax on any income of a venture capital companyor venture capital fundfrom investment in a venture capital undertaking.

1. Section 10(23FB)(a) defines a venture capital company  as a company recognized as venture capital company by SEBI .
2. Section 10(23FB)(b) defines a venture capital fund as a fund registered as Trust under Registration Act and granted certificate of registration by SEBI and which fulfills the conditions mentioned in SEBI regulations
3. Section 10(23FB)© from 01/04/2013 defines a Venture capital Undertaking to mean same as defined by SEBI.

What are the sectors in which the Venture Capital Undertaking can invest and get tax free income?

From 01/04/2013, there is no restriction regarding the sectors in which a VCU can invest. Before 01/04/2013, only nine sectors were prescribed u/s 10(23FB)© for which tax exemption was granted. But now, this restriction is no more there and once SEBI grants certificate of registration, a VCU can invest in any field within the SEBI framework. In nutshell,
if the VCC or VCF are registered with SEBI and abides by SEBI guidelines, its income is tax free fully.
Is there any specific provision regarding taxation of investors who pools money in a Venture Capital Fund or Company?
Yes, section 115U of the Income Tax Act deals with taxation of income received by the investors of VCC or VCF. Salient features of taxation of income in hand of investors who are recipient of such income from VCC or VCF are

1. The nature of income in hand of investors shall be same which was in hand of VCC or VCU. In other words, if nature of income in hand of VCC or VCF was Dividend, and it is distributed to investors, the nature will be dividend in hand of investor also. If nature of income in hand of VCC or VCF was Long Term Capital Gains, and that income is distributed, the nature will be LTCG in hand of investors also.

As per Rule 12C of the Income Tax Rule, a statement in Form No 64by 30^thNovember of the Financial year next to the year in which income was distributed  shall be filed with the Chief Commissioner or Commissioner who has the jurisdiction over the VCC or VCF functions by  the VCC or VCF . The Form requires to be signed (verified) by a Chartered Accountant.

From 01/04/2013 , whether a VCC or VCF distribute the money or not, the income shall be deemed to be received by the investors if it has accrued or arisen to the VCC or VCF in a year.

In other words, say A VCC receives dividend on 18/03/2013 or interested accrued to it on 30/09/2012 and in that year , it did not distribute any income to its investors, then on account of newly inserted clause 5 to section 115U effective from 01/04/2013 , the income in hands of investors shall be deemed to received in and taxable for FY 2012-13 i.e Asst Yr 2013-14  even when actually the income was not distributed by VCC .