PEs demand tax pass-through, more pension money in Budget

India's private equity (PE) sector has high hopes on the Narendra Modi government's first full-year Budget. PE players expect the Budget to have tax- and policy-related reforms. The major demands of the sector are to create domestic capital pools for PE and venture capital (VC) funds by encouraging insurance companies, pension funds and charitable trusts to invest in alternative investment funds (AIFs).

Globally, insurance companies, pension funds and charitable trusts (including university endowments) are prominent investors in PE/ VC funds. About $80 billion-plus investment was made in Indian companies by PE/VC over the past 10 years.

In India, rules governing pension funds and charitable trust do not permit investment in AIFs. "As a result, large pool of capital remains unavailable for PE/VC investments in start-ups, SMEs and growing companies," a pre-Budget memorandum submitted by the Indian Private Equity & Venture Capital Association (IVCA) to finance minister said.

According to the PE fraternity, The Pension Fund Regulatory and Development Authority should permit investment in alternate asset classes, while Section 11(5) of the Act should be amended to permit charitable trusts to invest in AIFs.

Raja Lahiri, partner, Grant Thornton India, said, "There is a need to encourage and enhance the participation of institutional investors such as LIC and pension funds in the Indian PE funds. One of the areas that needs to be clarified and simplified is pass-through taxation status for the Sebi-registered AIF structures. Bringing in clarity and certainly of tax is an important area to consider, since the capital-tapping potential from the Indian domestic institutions is massive and this should definitely be tapped."

Providing tax pass-through to all categories of AIF is another major demand. A pass-through status allows the fund to pass on the tax liability to the end-investor.

"Non-VCU (venture capital undertaking) income is taxed as per trust taxation framework, creating dual point of tax compliance and complexity in tax administration," the association said.

The PE sector demands that Section 10 (23FB) of the Act be amended to provide specific tax 'pass through' to income (including non-VCU income) earned by all categories of AIFs.

Arvind Mathur, president, IVCA, said: "Private equity and venture capital provides long-term stable capital unlike portfolio flows, or IPO capital, which are volatile. The government needs to promote both domestic and international private equity flows to support the financing needs of the Make-in-India programme."

On offshore funds, IVCA has demanded to remove uncertainty over GAAR (General Anti-Avoidance Rule) provisions on offset structures set up by PE funds. It has recommended that GAAR should not apply to existing structures/arrangements, which are legitimate as on March 31, 2015. The association has also demanded that GAAR should not be applied where SAAR (Specific Anti-Avoidance Rules) is applicable.