IVCA seeks tax parity, approval for AIFs to invest in NBFCs ahead of budget

Indian Private Equity and Venture Capital Association (IVCA) has requested the Union Government to bring in tax parity for the listed and unlisted shares and allow the category 1 Alternative Investment Funds (AIF) to invest in Non Banking Finance Companies (NBFC).

The association said that currently there is a considerable benefit on investing in listed shares than unlisted shares in terms of taxes levied. In order to further channelize domestic and foreign risk capital, there is a need for complete tax parity for investments in listed and unlisted securities.

As compared to domestic investors, Long Term Capital Gains (LTCG) earned by foreign investors in private companies attract taxation at a concessional rate of 10 per cent while domestic VC & PE investments taxed at 20 per cent (for LTCG) with an enhanced surcharge of 37 per cent.

Public market investments, which are inherently more volatile, are also taxed at a concessional tax rate of 10 per cent. Further, capital gains on listed shares are exempted from the enhanced surcharge rate of 37 per cent. 

"LTCG for unlisted shares (invested by AIFs that are regulated by SEBI) should be reduced to 10 per cent. Enhanced surcharge should be rolled back on unlisted shares," said IVCA.

The industry recommended that the domestic pension funds in India, including those managed/ regulated by PFRDA (National Pension System-NPS) and the Employee Provident Fund Organization (EPFO), could allocate up to one per cent of their assets to AIF by 2020, rising to 5 per cent by 2025, as they gain more experience. This would bring in additional domestic capital in circulation in the economy.  

"We recommend that large government institutions can be encouraged to channel a proportion of their investible surplus into domestic funds," it said.

SEBI should allow Venture Capital Funds to invest in NBFCs as there are start ups and early start ups in this category. However, certain restrictions should also be there while permitting a VCF to invest in NBFCs in order to assuage any systemic risks associated with investments in such companies.

Category III AIFs are subject to higher taxation and business income characterization. The industry demanded a clear tax regime for AIF III. This category is gaining popularity among investors as an alternate method of investing in the public market and is expected to grow manifold in the coming years.

Tax pass-through principle, presently accorded to Category I and II AIFs could be extended to Category III AIFs as well. Where Category III AIFs are also taxed on a pass-through basis, each of the investors could discharge taxes on the underlying income of the fund, such that the investment was directly made by the investor, it added. 

ESOPs should be taxed only at the time of sale of shares and not at the time of allotment of shares.

Zero-rating of services provided to AIF to the extent of foreign investor contributions with the amendment under GST law to notify any supplies made to AIF as “deemed export”. The services to the extent of foreign investors in an AIF are, in principle, consumed outside India. 

This will lead to onshoring of funds and fund managers and will lead to additional tax revenues and job creation in India for the government as related economic activity including the hiring of consultants, bankers and due diligence experts would happen onshore by the onshore fund managers/funds. High value-add fund management activity will also move onshore with export earnings.

AIFs managed by India-domiciled asset managers are liable to GST at a rate of 18 per cent.