Create how-india’s-tax-structure-rewards-growth-over-profits.md

Author: Shruthi1204

content/blog/how-india’s-tax-structure-rewards-growth-over-profits.md

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+---
+date: '2025-11-03'
+title: How India’s tax structure rewards growth over profits
+tags: [taxation,startups,business,investing]
+author: nithin
+link: https://x.com/Nithin0dha/status/1985316723533435191
+post_type: tweet
+description:  The math is simple...
+
+---
+If you take money out of a business as dividends, the effective tax rate is 52% (25% corporate tax + 35.5% on personal income). Through capital gains, it’s just 14.95% (with cess).
+
+Why does this matter? Here’s what you should know if you invest in IPOs.
+
+If you’re an investor (especially a VC), the math is simple: reduce corporate tax by showing minimal profits or losses. Spend (Burn) on acquiring users, build a growth narrative, and then sell shares at a higher valuation while paying much lower tax.
+
+This spending also makes it harder for competitors to survive. To be clear, we’re not discussing R&D spending here, which, incidentally, is very low in India (0.7% of GDP).
+
+What’s often overlooked is that VCs are essentially playing a tax arbitrage game. Look at most VC-backed businesses listed in the last few years, the reason they show little or no profit is partly due to this. Once you run a business this way, it’s extremely difficult to switch.
+
+Every startup that’s 7-8 years old from the time of raising the first round faces constant pressure from VCs for an exit. With almost no M&A opportunities in India, IPO is often the only way out.
+
+The government probably designed this tax arbitrage to incentivize companies to spend money and not just accumulate and distribute. But I’m unsure if the balance is correct. I think it’s also creating businesses that aren’t very resilient. One prolonged market downturn, and many of these unprofitable companies would struggle to survive.
+
+Two things that make this more interesting:
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+Unprofitable growth gets valued at much higher multiples than steady profits. A company doing ₹100 cr revenue with 100% growth might get 10-15x, while a profitable one with 20% growth gets 3-5x. So VCs aren’t just saving on tax; they’re in essence creating a 3x higher exit valuation.
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+If you’re competing against someone burning cash, you almost have to match it to defend market share, even if you don’t want to, because of the quirks I mentioned above.