A day after the Narayana Murthy-led committee on alternative investment funds (AIFs) submitted its report to the market regulator, industry experts gave thumbs-up to its recommendations. But the biggest takeaway from the report is bringing a taxation structure for AIFs that is similar to the equity markets and mutual funds.
The 21-member committee on AIFs had recommended introduction of the Securities Transaction Tax (STT) for private equity (PE) and venture capital (VC) funds invested through the AIF route. Acoording to the report, the income from AIFs should be tax free post STT — like any equity investments.”Given the high risk, relatively illiquid and stable nature of private equity and venture capital, it needs to at least be treated at par with volatile, short-term public market investments for taxation,” the report observed.
According to Andrew Holland, CEO, Ambit Investment Advisory, the recommendations if accepted would mark the beginning of a new regime. “Inconsistency in tax regime has hampered the growth of AIFs in India.You cannot have different tax regimes for different types of investments.If you look globally, there is a parity in terms of taxation on all types of investments including equity, mutual funds and hedge funds,” Holland said.
The SEBI constituted committee also suggested that the taxation on AIFs should not be higher than that paid by Foreign Portfolio Investors(FPIs) and Domestic Institutional Investors(DIIs). The panel recommended a 10% tax rate on Long Term Capital Gains (LTCG) to be applicable on transfers of shares of private limited companies.
“The suggestion about LTCG is a welcome move because it would help AIFs attract more foreign funds including global pension funds and hedge funds to invest in the country on a long term basis,” said Hemal Mehta, senior director, Deloitte adding that tax concession would help AIF industry to compete with overseas India dedicated funds.
Inorder to make AIFs more attractive, the Narayana Murthy-led committee suggested that authorities should aim for India-focused funds pooled and operated domestically.
“Rather than relying completely on foreign funds, the committee has suggested slew of measures to attract domestic funds. In India we have a huge pool of pension funds that are not actively invested into the Indian capital markets. Hence, the recommendation of the committee to allow more participation of domestic pension funds in AIFs is a welcome move,” said Radhika Gupta, business head, Forefront Capital, an Edelweiss Group company.
The inflows into AIFs has significantly picked up in the last two years.The cumulative funds raised via the AIF was `14,024.24 crore in Q2FY16 – triple the value of `5,874.5 in Q1FY15, data compiled by SEBI showed.AIFs are special investment vehicles established to pool in funds for investing in real estate, private equity and hedge funds.Sebi had released regulations for the AIFs in 2012.