In a detailed post on X (formerly Twitter), Kamath highlighted the huge tax gap between dividends and capital gains, calling it a key factor behind the growth-at-any-cost mindset.
“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%,” he wrote on his official X handle on Monday.
He explains why this matters for IPO investors and what they should know before making a move in the now lucrative looking primary markets.
In his view, this tax differential is a strong incentive for founders and investors to minimise profits and instead focus on keeping valuations high for a more tax-efficient exit.
“Spend on acquiring users, build a growth narrative, and sell shares at a higher valuation while paying much lower tax,” 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 VC cash.Kamath argued that most VC-backed IPOs in recent years reflect this trend, where companies show minimal profitability. The problem, he said, is structural: once a business is built around losses, it becomes extremely difficult to switch to sustainable profitability.
“Every startup that’s 7–8 years old from its first funding round faces constant pressure from VCs for an exit. With almost no M&A opportunities in India, IPOs are often the only way out,” Kamath observed.
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He suggested that the government may have unintentionally encouraged this model by designing tax incentives to promote spending and expansion, but warned that it may be undermining business resilience.
“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,” Kamath’s tweet said further.
“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 command 10–15x revenue multiples, while profitable firms growing at 20% may only fetch 3–5X.
“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,” the tweet said.
Through this tweet, the Zerodha CEO argues that venture capital is not just chasing growth but exploiting a tax gap while promoting risky spending and making sustainable, profit-led growth less attractive in India’s startup ecosystem.
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(Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times.)