Foreign investors get tax compliance relief for AIF investment in IFSC

The Income Tax Department has exempted foreign entities who invest in AIFs operating in IFSC, from obtaining PAN subject to certain conditions.

Alternative Investment Fund (AIF) refers to any fund established or incorporated in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign.

The Central Board of Direct Taxes (CBDT) has inserted a new Rule 114AAB notifying class or classes of persons to whom provisions of Section 139A of Income Tax Act for mandatory obtaining PAN shall not apply.

It specified that the provisions shall not apply to a non-resident if the non-resident does not earn any income in India, other than the income from investment in Category I or Category II Alternative Investment Fund (AIF) located in IFSC in India, and TDS on such income is deducted by the Specified Fund.

The norms also require the non-resident to furnish details and documents to the Specified Fund, namely - declaration containing name, address, country of residence and Tax Identification Number in the country or specified territory of his residence.

Further, the new Rule 114AAB requires the specified fund to furnish quarterly statement in respect of such non-resident in the newly notified Form 49BA.

Nangia Andersen LLP Partner Sunil Gidwani said it had been a long-pending demand by foreign investor community that they should be exempted from tax compliance since the Fund in IFSC would be withholding tax payable by the investors.

This would go a long way in making it easy for the fund managers to attract foreign investors in a fund set up in IFSC and would give impetus to IFSC as a fund jurisdiction, Gidwani said.

Based upon their investment, AIFs are divided into three categories -- Category I AIF, Category II AIF, Category III AIF.

Category I funds invest in start-ups, small and medium-sized enterprises (SMEs) and venture capital. Category II funds include private equity funds, real estate funds, among others. Category III AIFs include hedge funds.

In 2017, Sebi allowed alternative investment funds operating in IFSC to invest in securities listed in such centres. Besides, it permitted them to invest in securities issued by companies incorporated in IFSC.