AIFs are collective investment pools set up as trust and are crucial providers of risk capital to small, medium as well as large companies, most of whom are unlisted companies. Similarly, Securitisation Trusts are a crucial component of financial markets of every developed and developing economy. They perform an economically significant function by enabling lending banks and institutions to efficiently manage their prudential capital, and simultaneously provide institutional investors, who invest in the pass through certificates (PTCs) issued by Securitisation Trusts, yield improvement and lower risk on their investment in the PTCs.
Asset Reconstruction Companies (ARCs) Trusts play an economic function which facilitates smooth operation of Financial Institutions and Banks. They are specialized institutions that acquire non-performing loans (NPLs) from banks and financial institutions and resolve the NPLs through a combination of steps like enforcement of security, one-time settlement with borrowers, debt restructuring, corporate restructuring, asset sale, divestitures, etc and facilitate continuous flow of money in the economy.
However, the current tax regime for taxation of AIFs, Securitisation Trusts and ARC Trusts is replete with uncertainty and risk of double taxation. This uncertainty is a major stumbling block in the development of these trusts, said CII.
AIFs, Securitisation Trusts and ARC Trusts are pools of long term capital and at the core of the solution for providing investment funds to the economy. The current regime for taxation of such investment pools is replete with tax asymmetries resulting from risk of uncertainty and multiple taxation. For such trusts to effectively deliver their objective of providing long term funds to the economy there is an urgent need to provide them with a conducive tax regime, said Mr Chandrajit Banerjee, Director General, CII.
To achieve a stable and certain tax structure for such trusts, CII in its submission has suggested the following tax reforms to be undertaken in the Budget 2015 - 16:
Tax Pass through treatment for AIFs, Securitisation Trusts and ARC Trusts
More From This Section
The current tax regime vitiates the long prevailing principle underlying Indian tax policy under which non-corporate entities such as trusts have been subjected to only a single point economic taxation of their income. In collective investment pools such as AIFs, Securitization Trusts and ARC Trusts, it is imperative that investors in these trusts are treated as that single point of taxation, instead of the trust vehicle being treated as the single point of taxation. Indeed, it is only if investors in these trusts are directly taxed and the trust granted a tax pass through (exemption) status, that the tax asymmetries of double taxation would be eliminated. CII has recommended that the tax pass through regime for AIFs, Securitization Trusts and ARC Trusts can be legislated into the Income Tax Act (ITA) on the lines of the tax pass through regime for SEBI registered Venture Capital Funds.
Avoiding multiple taxation of income through grant of tax pass through status cannot ever be construed as a tax exemption causing loss of tax revenue. It can be looked at as an 'opportunity loss' of tax revenue that could flow from the revival of market for AIFs, securitization trusts and ARC Trusts under a tax pass through regime said Mr Banerjee.
Treatment of Investments by AIF- Category I and AIF-Category II as Capital Assets
The CBDT Circular No.13/2014 dated 28 July, 2014 has created an uncertainty with respect to gains from divestments by AIF-I and AIF-II being treated as business income. Providing tax certainty of capital gains treatment to divestment gains of AIF-I and AIF-II is crucial for the development of the market for these funds. a similar certainty of treatment of divestment gains of Foreign Institutional Investors (FIIs) was provided by the Finance Act 2014 through amendment to the definition of capital asset in sec. 2(14) of the ITA. Pursuant to this amendment, securities held by foreign institutional investors registered with SEBI are treated as capital assets. CII suggests that on the same lines, securities held by AIF-I and AIF-II should be treated as capital assets.
Indian Investment Manager should not constitute Permanent Establishment
India is emerging as an investment destination for significant foreign investment in financial assets of all kinds including, domestic AIFs, ARC Trusts, etc. These pools of capital often invest based on professional advice of fund managers who should ideally be based in India.
Presence of fund managers in India could be crucial for the success of investments made by foreign private equity funds, FIIs and other foreign investors directly into Indian companies or into domestic fund vehicles such as AIFs, securitization trusts and ARC Trusts. Due to prevailing tax rules, presence of fund managers in India could be construed as a Permanent Establishment (PE) in India of the foreign investors which will lead to taxation of capital gains earned on sale of the investments in India even where such gain may be exempt under the applicable Double Taxation Avoidance Agreement on the alleged ground that the investment forms part of the capital asset of the foreign investor's PE in India. With a view to set to rest these apprehensions, and with a view to lay down a strong foundation for the fund management industry and investment managers to resettle in India, CII has suggested that a clarificatory amendment should be introduced in section 9 of the ITA.
Powered by Capital Market - Live News
