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The Indian Venture Capital and Private Equity Association has approached Union finance minister Arun Jaitley with its post-Budget recommendations, seeking finetuning of some key proposals of the Budget, 2015-16.
For Alternative Investment Funds (AIFs) under the domestic private equity and venture capital (VC) funds category, the Association wants tax pass-through for any income of Category I and II AIFs and to amend the definition of 'capital asset' under the Income-Tax Act, to include investments held by AIFs. A pass-through status allows the fund to pass on the tax liability to the end-investor. Currently, specific tax pass-through is applicable only to AIF Category I venture capital funds (VCFs) and erstwhile VCFs.
Similar to the pass-through for net income, net losses incurred by AIFs should also be allowed to be passed on to investors, says IVCA.
Under the AIF regulations, Category I includes AIFs, which invest in start-ups, social ventures, and small and medium enterprises. Category II AIFs include private equity funds and category III AIFs are those like hedge funds.
Beside tax pass-through, IVCA asks that 10 per cent tax withholding should not be applied to payment of income exempt under the I-T Act. "In case of payment of income to a non-resident, tax withholding should be at the rate under the Act or the applicable tax treaty, whichever is more beneficial," said the memorandum.
For international/offshore PE and VC Funds, IVCA asks that the minimum number of members of a fund be lowered to 10, instead of 25, as proposed in the Budget. "For ascertaining the number of members in a fund, direct members/beneficiaries, as well as underlying members/beneficiaries, should be counted," it said.
According to IVCA, some of the clauses of Section 9A(3) should not apply where the investing entity is a foreign government or a government-related investor, including sovereign wealth funds, pension funds and insurance companies. Under Section 9A (3), for a company which does not have any shareholder who is an Indian citizen or who is a resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company.
Among the other demands are increasing the threshold of participation interest of a single investor in the fund from 10 per cent to 49 per cent and Minimum Alternate Tax provisions should not be applied to foreign companies investing in India (including foreign institutional investors), which do not have a place of business in India.
PE funds, domestic and foreign, have invested an estimated $93 billion in Indian companies at different stages of evolution, during the past 13 years.
IVCA notes PE has been a significant source of long-term risk capital for Indian businesses and that it is reported that the PE investment has resulted in the creation of several hundreds of thousands of jobs in the organised sector.
