AIFs to gain from tax pass-through status, new PE norms
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Mumbai: The budget on Saturday brought cheer to Alternate Investment Funds (AIF), as it has been proposed to accord tax pass-through status to all AIF categories and modify permanent establishment norms to help offshore fund managers shift to India.
“With a view to streamline the taxation regime of Alternative Investment Funds (AIFs), it is proposed to provide pass-through status to all the subcategories of category-I and also to category-II AIFs governed by the regulations of Securities and Exchange Board of India (SEBI),” said finance minister Arun Jaitley in his speech.
According to the Securities Exchange Board of India (SEBI) Alternate Investment Fund Regulations, 2012, which replaced the erstwhile SEBI (Venture Capital Fund) Regulations, 1996, only the Venture Capital Funds (VCF), part of the AIF category I, were allowed tax pass-through.
This left out other subcategories of AIF category I such as SME funds, social venture funds and infrastructure funds as well as Category II funds, which include private equity (PE) funds and debt funds.
“This move will have a positive impact and it clearly highlights that the government recognizes the importance of the alternate investment industry,”said Darius Pandole, partner at private equity fund New Silk Route, adding that the announcement will facilitate creation of more AIFs in the country.
“The announcements will help NRI and institution participation which constitutes a big segment of investors being targeted by the AIFs. But the big challenge on tax treatment to avoid double taxation for investors in AIF hasn’t been addressed. The government has shown clear intent to reduce administrative hassles for foreign investors,” said Ajay Garg, managing director at Equirus Capital, a domestic investment bank.
Jaitley also said permanent establishment norms will also be modified. “With a view to facilitate relocation of fund managers of offshore funds in India, it is proposed to modify the permanent establishment (PE) norms,” said Jaitley in his speech.
According to Zulfiqar Shivji, international liaison partner and head of transaction advisory services at BDO India LLP, an accounting and tax advisory firm, permanent establishment norm modification is a welcome move as most fund managers prefer to be closer to their investments than work from an offshore location.