Zerodha co-founder Nithin Kamath explains why India’s tax structure could fuel the IPO boom

Zerodha co-founder Nithin Kamath shared some valuable insights into the Indian IPO market on Monday, providing an easy-to-read analysis of how companies that prioritize growth over profitability populate the ecosystem and how the tax system can be a silent facilitator of this.

In a long post on X, Kamath explained how India’s tax structure can impact investors, especially venture capitalists (VCs).

Kamath explained that if someone withdraws money from the company as a dividend, the effective tax rate that such investors pay is 52%, including 25% corporate tax and 35.5% personal income tax. However, the withdrawal of money by capital gains could reduce tax significantly to just 14.95% including tax.

“If you’re an investor (especially a VC), the math is simple: lower your corporate tax by showing minimal profits or losses. Spend (burn) on user acquisition, build a growth narrative, then sell the stock at a higher valuation, paying much lower tax,” he wrote.

However, these expenses make it difficult for competitors to survive, Zerodha’s CEO said.

Kamath noted that venture capitalists are essentially playing a tax arbitrage game, he said, adding that most VC-backed companies that have gone public in the past few years are making little or no profits.

“When you run a company this way, it is extremely difficult to change it,” he said.

The government is planning tax arbitrage?

Explaining further, Nithin Kamath He said startups that are 7-8 years old are under constant pressure from VCs to exit. So, with almost no prospects for mergers and acquisitions in India, IPO often becomes the only option.

“The government has probably designed this tax arbitrage to encourage companies to spend rather than just collect and distribute money. 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 will struggle to survive,” said the Zerodha co-founder.

Quirks of the Indian stock market

Nikhil Kamath noted this further Unprofitable development is often rewarded with a higher market valuation.

“The company does ₹100 cr revenue at 100% growth can get 10-15x while profitable at 20% growth can get 3-5x. So VCs don’t just save on taxes; in fact, they create an exit valuation that is three times higher,” he said.

“If you’re competing with someone who’s burning money, you almost have to match them to defend market share, even if you don’t want to, because of the quirks I mentioned above,” Kamath added.