Quick Summary
Foreign private equity (PE) and venture capital (VC) funds are increasingly pushing for tax-related indemnity clauses in their investment agreements with Indian startups, according to legal experts. This shift comes in response to a surge in direct and indirect tax notices targeting startups, prompting a need for greater protection against potential revenue losses due to unforeseen tax liabilities. Historically, investment contracts included broad indemnity clauses covering general risks. Howev
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FAQ :
Foreign investors are seeking tax indemnities due to a rise in direct and indirect tax notices targeting Indian startups, which exposes them to potential revenue losses from unforeseen tax liabilities.
Investment contracts are moving from broad indemnity clauses covering general risks to more specific tax indemnity provisions designed to shield investors from unexpected tax demands.
Startups have received tax notices related to goods and services tax (GST), angel tax, and other direct taxes, including capital gains tax.
Yes, tax insurance is gaining popularity in India as a way to strengthen indemnity provisions and allow sellers to exit transactions without future claim concerns.
Penalties from tax demands can exceed a startup's revenue or market capitalisation, and startups may need to deposit 20% of the total tax demand before filing an appeal.
Yes, Indian promoters and companies are increasingly seeking indemnity from foreign investors concerning capital gains tax issues.
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