'Tax Arbitrage Game': Nithin Kamath On Why VC-Backed Firms Barely Show Profit Before IPO

Zerodha co-founder Nithin Kamath on Wednesday took to social media to criticise what he described as the "tax arbitration game" of venture capitalists backing various Indian startups.

"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," he posted on social media platform X.

Kamath explained that if one takes money out of a business as dividend, the effective tax rate is 52%, which includes 25% corporate tax and 35.5% tax on personal income. On the other hand, capital gains are taxed at 14.95% with cess.

The VCs, according to Kamath, are "essentially playing a tax arbitrage game". Most of the VC-backed businesses listed in the last few years "show little or no profit", and the reason is partly due to this, he said. "Once you run a business this way, it's extremely difficult to switch."

Startups, that have aged 7-8 years, usually face a constant pressure from VCs to pave the way for their exit, the Zerodha co-founder said. With almost no M&A opportunities in India, IPO is often the only way out, he noted.

"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," he further said.

Kamath's comments come at a time when India's primary market is seeing a boom, in terms of the public issues being floated. Last week, a debate also erupted over the Rs 70,000-crore valuation of Lenskart, which recently turned profitable. The eyewear retailer's IPO is currently open for subscription.

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).

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November 3, 2025

Kamath, without making a specific reference to any company, said unprofitable growth gets "valued at much higher multiples than steady profits".

A company doing Rs 100-crore 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," he said.

"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," he added.

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