The SEBI panel had recommended that if AIF investors are levied STT at various points of transaction it could yield STT tax revenues of approximately Rs 11,434 crore for the country during the next 15 years
Finance Minister Arun Jaitley in his Union budget 2018 address today said that the government will take measures to improve and strengthen Alternate Investment Funds (AIFs), such as private equities, venture capital funds.
"Venture capital and angel investors need an innovative development and regulatory regime. We will take additional measures to strengthen their role and increase the impact of AIFs," Jaitley said in the speech.
A 25-member SEBI panel led by Narayan Murthy had recommended that AIFs be brought under the securities transaction tax (STT).
The panel had recommended that if AIF investors are levied STT at various points of transaction it could yield STT tax revenues of approximately Rs 11,434 crore for the country during the next 15 years.
Prominent investor Mohandas Pai welcomed the move and said it will simplify the complicated taxation that exists on funds that invest on unlisted stocks. “India has a huge investment deficit. Simplifying taxation will increase the inflow. Taxation for AFIs should be at par with other funds such as MFs,” Pai added.
The panel had said that AIF investors should be made liable to pay STT firstly at the time of entry when the investor purchases units, secondly, when income is distributed during the unit holding period, and, finally, when the investor exits by the transfer of units.
Currently, fund managers are discouraged from setting up fund pools in India because of taxation issues, including a GST of 18 percent as fund management fee.
According to analysis reports, only 5 percent of the venture capital money in Indian startups comes from domestic sources and 85 percent of the limited partners managed their India venture/PE portfolios from offshore locations.
The panel report had also said that the GST rate on services rendered to an AIF should be reduced to 5 percent, if the majority of the investors of an AIF are foreign entities. Alternatively, nominee and non-executive directors appointed by AIFs on the boards of their portfolio companies should be excluded from the provisions of GST.
“The current GST framework discourages AIFs involving foreign investors to enter India. It becomes an incremental cost for AIFs. Investing in unlisted stocks is as it is risky and uncertain,” Pai said.
However, Rajat Tandon, president of Indian Private Equity & Venture Capital Association indicated that the Government will take the GST rate issue outside the purview of the budget.
“We also recommend that the private equity industry is given a pass-through of losses at the end of fund life for Category 1 and Category 2 alternative investment funds (AIFs),” Rajat Tandon, president of Indian Private Equity & Venture Capital Association said.
According to the existing regulations, profits can be passed onto investors, but losses have to be kept at the fund level. Interestingly, SEBI’s original venture capital regulations of 1996 allowed this. These were replaced by SEBI’s AIF regulations in 2012. “If the pass-through is allowed, investors will take more risks. They won’t mind taking losses in one or two companies if they know they will get the full benefit,” Tandon said.The panel had also recommended that any income earned by an offshore investor through AIFs in an IFSC (international financial services center) should be exempted from tax. Also, there should be relaxation from filing return of income and obtaining a PAN number for offshore investors in an AIF in an IFSC.
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