Taxing Truths: Nithin Kamath Unpacks How India’s Tax Code Fuels IPO Frenzy and Startup Losses

Updated: November 04, 2025 03:16

Image Source: Times Of India

Zerodha co-founder Nithin Kamath has spotlighted India’s tax structure as a key driver behind the surge in IPOs and the persistence of loss-making startups. In a detailed post, he explains how tax arbitrage between dividends and capital gains incentivizes founders and investors to prioritize growth and valuations over profitability.

From Tax to Ticker: Kamath’s Breakdown of India’s Startup IPO Boom

In a candid and data-backed post on X (formerly Twitter), Nithin Kamath, co-founder and CEO of Zerodha, has offered a compelling theory on why India’s IPO market is booming—and why many startups continue to operate at a loss. His explanation centers on a tax arbitrage loophole that quietly shapes investor behavior and corporate strategy.

Key Highlights from Kamath’s Analysis:

The Tax Gap That Drives Strategy

Kamath explains that withdrawing money from a business as dividends incurs a 52% effective tax rate (25% corporate tax + 35.5% personal income tax).

In contrast, exiting via capital gains—typically through IPOs or share sales—results in a much lower 14.95% tax rate, including cess.

Growth Over Profitability

This disparity incentivizes founders and venture capitalists to minimize profits, reinvest aggressively, and inflate valuations.

Kamath notes that many VC-backed startups go public while still loss-making, driven by the promise of future growth rather than current earnings.

Limited Exit Options

With few avenues for profitable exits, IPOs become the preferred route for investors to monetize their stakes.

Kamath warns that this dynamic can lead to structurally unsustainable business models, where profitability is delayed indefinitely.

Investor Caution Advised

Kamath urges retail investors to be wary of startups that prioritize valuation narratives over sound financials.

He emphasizes the importance of understanding how tax incentives shape corporate behavior, especially in high-growth sectors.

Broader Implications

The post has sparked debate among financial analysts, with many agreeing that India’s tax policy may need reform to encourage sustainable entrepreneurship.

Kamath’s insights highlight the unintended consequences of fiscal policy on market dynamics.

Kamath’s breakdown is a timely reminder that behind every IPO lies a complex web of incentives—and that tax codes can quietly shape the future of innovation.

Sources: Livemint, Business Today

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