Budget 2017 – Tax benefits in store for Alternative Investment Funds?

Budget 2017 – Tax benefits in store for Alternative Investment Funds?

There is some good news for venture capitalists (VCs), private equity (PE) firms, angel investors, and hedge funds. In Budget 2017, Finance Minister, Arun Jaitley may propose creation of a favourable tax environment for these Alternative Investment Funds (AIFs). This would be part of the broader strategy of the government to ease the flow of funds for SMEs and start-ups.

SEBI panel on AIFs headed by N. R. Narayana Murthy recently made certain key recommendations. The government is likely to draw insights from these recommendations and announce relevant measures in the Union Budget for 2017-18. One of the measures the government is examining includes providing

hedge funds or Category III AIFs with a tax pass-through status. Thus, rather than taxing the fund, income would be taxed only at the investor's end.

AIF pool in funds from high net-worth individuals (HNIs) and invests those funds in various unlisted securities, SMEs, and start-ups with the main goal of promoting entrepreneurship. In the past decade, VC and PE funds have invested huge sums into the growing e-commerce industry of India. This was driven primarily by a positive sentiment that the mobile Internet space is expanding rapidly in India.

As per a study by Nasscom and Zinnov Consulting, in terms of number of start-ups, India is the third highest globally with the US and the UK being the first and second. Moreover, there were some highly interesting insights that the study provided. As per the study, around 4 new start-ups enter the Indian market each day. As of today, Indian start-ups have received funding to the tune of ~$5 bn through AIFs. As per the Narayana Murthy Panel's report, more than 3000 Indian companies spanning 12 top sectors have received more than $100 bn in terms of funds from AIFs during 2001-2015.

SEBI classified AIFs into the three broad categories in 2012:

Category I AIFs – These are infrastructure or social venture funds that have a positive impact on the Indian economy.

Category II AIFs – PE, VC, and Debt funds come under this category Category III AIFs – This category includes hedge funds.

The committee has recommended some major changes in terms of taxation policy adopted for AIFs, which include introduction of securities transaction tax (STT) for PE and VC investments. The committee believes this has worked

well for foreign portfolio investors (FPIs) for many years in case of foreign portfolio investors. Moreover, the committee recommended certain minor adjustments to the safe harbour norms. Further, the panel suggested that the government must exempt companies that raise funds from overseas investors from paying service tax.

Finance Minister, Arun Jaitley had announced tax pass-through status for Category I and II AIFs in Union Budget 2015. Therefore, all eyes will be on Mr. Jaitley during Union Budget 2017.