The Rs 5,000-crore alternate investment fund (AIF) sector is relieved at a favourable ruling by the income tax tribunal. The latter has ruled that a recent circular by the Central Board of Direct Tax (CBDT) cannot be applied retrospectively.
These pooled investment vehicles were staring at the possibility of a Rs 1,500-crore tax liability, after the circular had put a question mark on the ‘trust’ structure that AIF entities operating with. To enjoy the benefits under the trust structure, it had said in July, all AIFs would have to expressly state the names of all investors and their beneficiaries. Those unable to do so would have been subject to the maximum tax rate of 33 per cent.
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The circular had put existing AIF schemes in a spot.
“The beneficiaries keep changing as new investors are added and existing investors exit, based on their own strategy,” said an AIF entity.
Last week, Income Tax Appellate Tribunal (ITAT) in Bangalore ruled that with the India Advantage Fund, as the trust document prescribes the mechanism to determine the beneficial interest, this should suffice to give the trust a tax benefit. The tribunal also held that the CBDT circular cannot be applied to AIF funds set up prior to July. However, it didn't give clarity on the circular's applicability in the current year.
“This will also help AIFs that were planning to launch, as this ruling gives them some clarity on the tax liability,” said Nitesh Mehta, executive director, Walker Chandiok & Co LLP.
The trust structure has been the preferred route for AIF operators to avail partial pass-through status. Legal experts said the tribunal’s ruling will give the nascent AIF sector a needed breather.
“Since the CBDT circular was more in the nature of a guidance or clarification issued to the tax department, the ITAT ruling in case of a tax litigation may be an effective point of argument for private equity and AIFs and can be viewed as a positive indication for the funds industry,” said Tejesh Chitlangi, partner, IC Legal.
The launch of new AIF schemes had paused in recent months due to lack of clarity on taxation. AIFs as a separate investment category was notified by the Securities and Exchange Board of India in 2012. Almost all major players in the financial market have launched AIF schemes. At the end of 2013-14, AIFs had mopped at least Rs 5,000 crore in investments and received commitments for Rs 13,000 crore.