Budget 2018: Alternative investments need to be given a stimulus

Given the similarities in the structures of Mutual Funds and AIFs, STT should apply to transactions in units of AIFs.

January 31, 2018 / 01:43 PM IST

Archit Lohia

The off-late discussions on removing Long-Term Capital Gains Tax (“LTCG”) exemption on sale of listed company shares, through the Exchange platform, have taken centre stage and in my opinion, it may also need to be accompanied by removal of Securities Transaction Tax (“STT”). This avoids Double Taxation. This is where Tax Expectations of the Alternative Industry differs, because I hope government to introduce STT!

Alternative Investment Funds (“AIFs”)classified into 3 Categories, have grown significantly over the past 11 quarters. No. of Registered AIFs have grown from 158 Funds as on March 31, 2015 to 315 Funds as on March 31, 2017. Investments made by AIFs have crossed Rs. 43000 crore as on September 30, 2017, with major investments being in Category II Funds.

However, AIFs still remain optimistic for the necessary stimulus required from the Government to boost growth and size of the industry, compared to the global industry.In my opinion, major tax expectations of the Alternative Investments industry, from Budget, 2018 are:

Introduction of STT

Given the similarities in the structures of Mutual Funds and AIFs, STT should apply to transactions in units of AIFs.I believe if STT is introduced, it can reduce compliance and litigation costs and also help government increase tax collection on a continuous basis. STT can be collected at all the three stages of investment:

  • At the time of entry, when investor purchases units

  • When income is distributed during the unit holding period

  • When the investor exits by the transfer of units

Effective Pass-through Tax System:

  • There should be no withholding of exempt income, like Dividend and Long Term Capital Gain

  • Make Pass-through structure available to Category III AIFs, which are efficient Pooled Investment Vehicles for investors not willing to invest directly in securities

  • Profits made by AIF on transfer of unlisted securities should be treated as Capital Gains, and not Business Income

  • Any Loss made by the AIF should be allowed for set-off against Income of Investors, instead of Future Business Profits of the Fund, as no taxable income is earned by the AIF in its account

  • Allow management expenses for AIF investments to be capitalized as ‘cost of improvement’

Unit-based Taxation:

Hedge Funds in India have AUM of USD 1.4 Billion, as compared to the Global Hedge Fund AUM of USD 3.4 Trillion. To ensure AIFs have a level playing field with Mutual Funds, Registered AIFs should be exempt from tax and tax should be charged to investors as:

  • Distribution tax on income distributions

  • Capital gains tax on unit redemptions/transfers

Tweaking Safe-Harbour Provisions:

In order to promote Investments by Foreign Portfolio Investors (FPIs) and ensure Onshore Fund Management of AIFs in India, safe harbour provisions in Section 9A should be suitably amended, such that:

  • Certain conditions of the Section do not apply to Category I and Category II FPIs

  • Investment Manager definition is broadened and restrictions on investor diversification are removed

Indirect Transfer Provisions

FPIs invest in different stakeholders and at different stages in the Indian Start-up Ecosystem, which fosters growth and creates jobs in the economy. Considering the growth opportunities, Indirect Transfer Provisions should not prove to be a dampener (Ex: Vodafone Case). Hence most foreign entities and PE Funds, typically those having a multi-layer structure expect that indirect transfer provisions should not be applicable in cases where:

  • Transfer/redemption by reason of transfer of capital assets situated in India

  • Transfer/redemption of shares does not alter the ownership structure of any company in the transaction.

(The writer is Chartered Alternative Investment Association (CAIA) India Committee Member)
Moneycontrol Contributor
first published: Jan 31, 2018 01:43 pm

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