Narayana Murthy panel pitches for friendly tax regime for AIFs

Panel has suggested a suitable tax and regulatory framework for domiciliation of AIFs in IFSCs

The Securities and Exchange Board of India's (Sebi) expert panel has pitched for friendly tax regime and greater participation through the International Financial Services Centre (IFSC) for the alternative investment fund (AIF) industry.

The Alternative Investment Policy Advisory Committee (AIPAC), headed by Infosys' founder Narayana Murthy, has 24 other members, representing Sebi, Reserve Bank of India, government and the industry. The committee has proposed five per cent good and services tax (GST) rate for services availed by the industry. It has also called for more tax-breaks, pass-through status and offsetting of losses. Further, it devised a framework for AIFs to operate on a big scale at the IFSC.

The panel, which submitted its third report in November, was made public on Friday. The committee was constituted in 2015.

The panel has proposed that AIFs domiciled at IFSCs shall be permitted to invest outside India freely, without requiring any regulatory approvals from Sebi or the RBI. Currently, there are investment caps and other restrictions on such funds.

The panel has also pitched for direct entry for overseas investors or funds into the IFSC.

"In order to encourage foreign investors to directly come into the IFSC without worrying about the hassle of Indian tax compliances, the government of India should exempt foreign investors from obtaining PAN number and filing of tax return in India," it said.

In terms of changes to the tax structure, the panel has said, "A pass-through tax regime should not distinguish between gains and losses. Therefore, similar to the pass-through for net income, net losses incurred by unlisted AIFs, under any head of income, should also be allowed to be passed on to the investors."

The panel said its proposals will help grow the supply of risk capital in India in the form of private equity and venture capital through AIFs.

"The positive economic trends affecting the investment climate in India can pave the way for greater domestic and international flows of venture capital, private equity and alternative investments. AIPAC has made a number of recommendations in its previous reports as well as in this third AIPAC report to create a favourable environment for these capital flows. Ultimately, such flows will lead to a greater development and job creation in India," the panel said.

As on September 2017, the AIF industry had made investments worth Rs 435 billion. It has received investments worth Rs 1,160 billion and raised funds to the tune of Rs 618 billion.

Sebi has sought comments from the public till February 9 on the report.