Murthy panel pitches for friendly tax regime for AIFs

With an aim to further develop the alternative investment industry, a Sebi panel today recommended suitable tax as well as regulatory framework for AIFs.
The suggestions of the committee, chaired by Infosys co-founder N R Narayana Murthy, also recommended social enterprises as a separate category of alternative investment funds (AIFs).
To incentivise offshore fund managers (who invest in India but operate from abroad) to shift their fund management and administration to the country, the panel has suggested a suitable tax and regulatory framework for the domiciliation of AIFs in International Financial Services Centres (IFSCs).
Further, it has pitched for allocation of Corporate Social Responsibility (CSR) funds to Category I AIF -- Social Venture Funds.

Also, it said nominee and non-executive directors appointed by AIFs on the boards of their portfolio companies should be excluded from the provisions of the Goods and Services Tax (GST).
"The issue of levy of GST on such profit sharing between Limited Partners and General Partners may lead to uncertainty. It should be clarified that GST is not applicable on distribution of share in income or profits to General Partners or their employees," the panel said in its 157-page report.

The regulator had constituted a 21-member standing committee -- Alternative Investment Policy Advisory Committee -- in March 2015 with the mandate to prepare a new regulatory framework for alternative investments. This is the committee's third report. It had submitted its first and second set of recommendations in January 2016 and November 2016.

The Securities and Exchange Board of India (Sebi) has sought comments from the public till February 9 on the report.
The panel has suggested promoting AIFs with foreign limited partners in IFSCs, a move that will enhance the development of the Indian capital markets.
It has also suggested exemption from tax for any income earned by an offshore investor from investments made outside India through an AIF in an IFSC as well as relaxation from filing return of income and obtaining PAN for offshore investors in IFSCs.
The current regulatory regime for the establishment of AIFs in an IFSC is restrictive and offers investment in limited products and sectors.

Further, it has recommended implementing an investor- level taxation approach for Category III AIFs. Under such a regime, such AIFs will pay tax on income/gains arising from investment in units of Category III AIFs.
It has suggested exemption to listed AIFs for all streams of income earned by listed AIFs on its investments in Indian portfolio entities.
"In recent years, the government has done much to reform and institute pass-through taxation of Categories I and II AIFs. The committee will highly appreciate if the taxation of AIFs in Category III can now be addressed given that the present trust-based taxation approach is complex and ambiguous," Murthy said.

Overall, the number of all categories of AIFs increased by nearly 50 per cent in the last 15-month period ended September 30, 2017, reaching 374 funds.
Category III AIFs have nearly doubled in number, reaching 67 funds, while Category II AIFs have grown by 42 per cent and Category I AIFs have climbed 21 per cent to 108.