The alternative investments fund market in India has got a shot in the arm with the government relaxing transfer pricing norms to avoid multiple taxations for offshore fund set-up as multi-tier investment structures.
The Central Board of Direct Taxes (CBDT), India's direct taxes body, in a circular issued earlier this week said the indirect transfer provisions will not apply in respect of income accruing to non-resident investors due to the redemption of shares in a multi-tier investment fund in India, held through upstream companies based abroad.
This has addressed concerns raised by private equity and venture capital funds that non-resident funds set-up as multi-tier investment structures suffer multiple taxations, at the time of subsequent redemption or buyback of shares.
Foreign institutional investors already enjoyed the exemption from the indirect transfer provisions introduced in 2012, and a similar exemption had been a long-standing demand of the AIF industry.
"AIF industry gets another booster (as) CBDT issues indirect transfer (to provide) more comfort to foreign investors in AIFs," tweeted Gopal Srinivasan, chairman of Indian Private Equity and Venture Capital Association (IVCA).
The government had said this long back but now with the circular, the revenue department has made it clear that the tax will not be applicable on multi-level structures under ‘indirect transfer’ provisions, said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
"This is a relief to all India-focussed funds including pension funds, PE, VC and even sovereign wealth funds,” said Maheshwari.
However, the circular comes with some riders. It says that the benefit shall be applicable only in those cases where the proceeds of redemption or buyback arising to the non-resident do not exceed the pro-rata share of the non-resident in the total consideration realised by the specified funds from the said transfer of shares or securities in India.
Also, a non-resident investing directly in the specified funds shall continue to be taxed as per the extant provisions of the Act, it added.
Recent benefits announced for AIFs
The CBDT booster adds to a string of other benefits that the government has actively been doling out to the AIF industry.
Early in September, the Reserve Bank of India (RBI) permitted banks to invest up to 10% of the paid-up capital or unit capital in a category I or category II AIF. It, however, said banks cannot invest in category III AIFs.
In June, market regulator the Securities and Exchange Board of India (SEBI) decided to waive the one-year lock-in period, after the initial public offering for category II AIFs. "This will allow private equity funds to time their exits from investee firms to favourable markets and unlock greater value for investors by capitalising on post-listing gains in IPO stocks," IVCA's Srinivasan wrote in a column for VCCircle.
"Hat-trick of boosters to AIFs within 90 days from SEBI, RBI and CBDT," added Srinivasan's tweet referring to the measure taken by the three regulatory bodies.
The relaxation of these norms is likely to give a boost to fund managers, even as a lot of dry powder has piled up with a big chunk flowing from high net-worth individuals (HNIs).
PE and VC funds registered with SEBI added Rs 6,460 crore (around $1 billion) in fresh dry powder in the April-June quarter to take the total pile to Rs 51,877 crore, according to VCCircle estimates.