Mumbai: India’s market regulator has recommended new tax rules for alternative investment funds, people familiar with the matter said, a move that would boost the country’s fledgling hedge fund industry.
The Securities and Exchange Board of India (Sebi) is seeking “unit-based" taxation for products broadly classified as hedge funds as part of its proposals for the union budget due on 1 February, said the people, who asked not to be identified because the matter is confidential.
If approved, the designation would reduce fund managers’ administrative burdens and make the country’s equity hedge-fund investors eligible for capital-gains tax exemptions after one year, moving the rules more in line with those for mutual funds. Unfavourable tax treatment has been a key barrier to growth for India’s $2 billion hedge fund industry, which pales in comparison to the $348 billion market in China.
“High taxes are a big hurdle," Andrew Holland, chief executive officer at Avendus Capital Alternate Strategies in Mumbai, said in an interview before Bloomberg reported Sebi’s recommendation. “We want a level playing field with the mutual fund industry."
Officials at Sebi and India’s finance ministry didn’t immediately respond to requests for comment. Sebi’s proposals would need approval in the federal budget and a signoff from Central Board of Direct Taxes (CBDT) to take effect.
Sebi has also asked for a so-called tax pass through for losses in other alternative investment products, including venture capital, real estate and private equity, the people said. That would allow investors to offset their personal tax bill if fund stakes suffer losses.
Assets in alternative investment funds (AIF) rose after last year’s budget granted tax pass through for profits in certain product types, enabling some investors to pay lower rates. Total AIF investments swelled to Rs43,500 crore ($6.9 billion) in September 2017 from Rs28,500 crore in December 2016, according to Sebi. Bloomberg