To make Alternative Investment Funds (AIFs) more attractive, government today announced tax pass-through status to such funds and also allowed foreign investments in these instruments.
AIFs are a new class of pooled-in investment vehicles for real estate, private equity and hedge funds, among others. These funds can operate broadly in three categories under Sebi guidelines.
"Keeping in view the need to increase investments from all sources, I propose to also allow foreign investments in Alternate Investment Funds," Finance Minister Arun Jaitley said while Presenting the Budget for 2015-16 in the Lok Sabha.
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Besides, the minister has accorded tax pass-through status to Category I and II AIFs.
A pass-through entity is a special business structure that is used to reduce the effects of double taxation. In case of pass-through entities, corporate income is allocated among the owners, and income taxes are only levied at the individual level.
AIFs, which have been so far facilitating domestic investments, are funds established or incorporated in India for the purpose of pooling in capital from Indian investors for investing as per a pre-decided policy.
The market regulator, in May 2012, notified the guidelines for this new class of market intermediaries.
The Category-I AIFs invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable.
The Category-II AIFs are funds including private equity funds or debt funds and Category-III AIFs are those trading with a view to making short-term returns and it includes hedge funds, among others.
Religare Global Asset Management CEO Nalin Nayyar said: "The Union Budget 2015 provides fillip to the AIF industry in India. These funds will be greatly benefited from grant of tax pass through status of AIF category II funds and proposed allowance of foreign investment into AIFs.
Bijal Ajinkya, Partner at Khaitan & Co, said: "The tax pass-through accorded to Category I and II AIFs is a big sigh of relief for investors and funds, who were embroiled in prolonged controversies on who pays the tax on income of such AIFs.
"...Interestingly, silence on the taxability of Category III AIFs, leads to a contra juxtaposition on whether it is expected that tax be paid at the AIF level. The uncertainty as to whether the income is business income or capital gains continues Category III AIFs," he added.
Another expert, Ajay Garg, Managing Director at Equirus Capital, said: "It will help NRI and institutional participation which constitutes a big segment of investors being targeted by the AIF. But the big challenge on tax treatment to avoid double taxation for investors in AIF has not been addressed.
