PEs want FM to tweak few Budget proposals

The Indian private equity (PE) sector, while happy with the Budget proposals, are hopeful some of these would be tweaked to shower more benefits to the sector.

Although Finance Minister Arun Jaitley has brought in a number of proposals to support PE investments as well as fund-raising, PE funds expect a fine-tuning of the proposals, especially those concerning taxes, to create a smooth investment scenario.

Allowing foreign investment in alternative investment funds (AIFs) - a category of pooled-in investment vehicles for real estate, private equity, and hedge funds - is considered a good move for Indian PE. However, the current withholding tax of 10 per cent still remains a major hurdle for foreign investors, they believe.

BUDGET PROPOSALS

• Foreign investments in AIFs
• Tax pass through status to AIF I, AIF II fund manager of FPI exempted from permanent
  establishments in India
• The deferral of GAAR to 2 years

UNMET DEMANDS

• Remove withholding tax of 10%
• Include category III AIFs for tax pass-through
• Not to consider permanent establishments for offshore private equity, VC funds

Arvind Mathur, president, Indian Venture Capital and Private Equity Association, said, "We are happy the finance minister has considered our proposals in the Budget. However, we need some more clarity as far as tax parts are concerned."

"The finance minister, in his speech, has provided the pass-through status to Category I and Category II AIFs. Overtime, Category III AIF's should also be considered for pass-through status, since pass-through is not a concession."

A pass-through status allows the fund to pass on the tax liability to the end-investor. Currently, specific tax 'pass through' is applicable only to AIF Category I venture capital funds (VCFs) and erstwhile VCFs.

The amendment to permanent establishment is also considered a big step for the PE sector.

"It was clarified that the fund manager of a FPI (foreign portfolio investor) will not constitute a permanent establishment in India. It is important that this should be extended to offshore PE and venture capital funds. If needed, we will make more recommendations to ensure that Indian affiliates / offices of offshore PE and venture capital funds or those of their advisers are not considered as permanent establishments," said Mathur.

The PE sector had demanded steps to encourage insurance companies, Employees' Provident Fund Organisation, pension funds, and charitable trusts to invest in AIFs. However, nothing to this effect was mentioned in the Budget. In India, regulations governing pension funds and charitable trust do not permit investment in AIFs.