“If you take money out of a company as dividends, the effective tax rate is 52% (25% corporate tax + 35.5% on personal income). Through capital gains it is only 14.95%,” he wrote on his official X-handle on Monday.He explains why this is important for IPO investors and what they need to know before taking a step into the now lucrative-looking primary markets.
According to him, this tax differential is a strong incentive for founders and investors to minimize profits and instead focus on keeping valuations high for a more tax-efficient exit.
“Spend on acquiring users, build a growth story and sell shares at a higher valuation and pay much lower taxes,” he explained, adding that this model also squeezes competitors out of the market. He noted that this approach is not about R&D spending, which remains low in India at just 0.7% of GDP, but rather about marketing and customer acquisition – often funded by venture capital. Kamath argued that most venture capital-backed IPOs in recent years reflect this trend, with companies showing minimal profitability. The problem, he says, is structural: once a company is built around losses, it becomes extremely difficult to transition to sustainable profitability.
“Any startup that is seven to eight years old from its first round of funding faces constant pressure from VC firms to exit. With almost no M&A opportunities in India, IPOs are often the only way out,” Kamath said.
Also read: Lenskart’s IPO price raises concerns over valuation of Indian startups
He suggested that the government may have inadvertently encouraged this model by designing fiscal incentives to promote spending and expansion, but warned that this could undermine business resilience.
“The government probably designed this tax arbitrage to encourage companies to spend money and not just accumulate and distribute. But I’m not sure the balance is right. I think it also creates companies that are not very resilient. One prolonged market downturn and many of these unprofitable companies would struggle to survive,” Kamath’s tweet said.
“One prolonged market downturn, and many of these unprofitable companies would struggle to survive,” he said.
Kamath also pointed out that the system rewards unprofitable growth with higher valuations, noting that companies growing at 100% annually can achieve a revenue multiple of 10 to 15 times, while profitable companies growing at 20% might only earn 3 to 5 times as much.
“Unprofitable growth is valued at much higher multiples than stable earnings. A company with a turnover of ₹100 cr at 100% growth can get 10-15x, while a profitable company with 20% growth gets 3-5x. So VCs are not just saving on taxes; they are essentially creating a 3x higher exit valuation,” the tweet said.
Through this tweet, Zerodha’s CEO argues that venture capital is not only chasing growth but also exploiting a tax gap while promoting risky spending and making sustainable, profit-driven growth less attractive in India’s startup ecosystem.
Also read: Zerodha’s youngest account holder is 64 days old, says Nithin Kamath. Here’s how
(Disclaimer: The recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times.)
#IPO #Investor #Alert #Zerodha #CEO #Nithin #Kamath #Spotlights #Tax #Arbitrage #Venture #Capital #Firms #Boosts #Valuations