Alternative investment funds to be eligible for exemption

Alternative investment funds irrespective of whether they are set up as a trust, company or limited liability firm will be eligible for pass through exemption on income.

Existing provisions exempt income of a venture capital company (VCC) or a venture capital fund (VCF) from investment made in a venture capital undertaking (VCU).

This pertains to VCC and VCF that fall under Category –I and Category II Alternative Investment Funds.

However, the exemption is only for VCF and VCU set up as a trust or company and registered with SEBI.

The pass through status has it that the income is taxable at the hands of investors who invested in VCC and VCF.

Henceforth, the exemptions will be applicable to such funds irrespective of whether they are set up as a trust, company or limited liability firm.

CARRY FORWARD

If in any year there is a loss at the fund level, either current loss or loss, which remains to be set off, the loss will not be allowed to be passed through to the investors but carried over at fund level to be set off against income of the next year.

Dividend distribution tax will not apply to the income paid by an investment fund to its unit holders. The income received by the investment fund would be exempt from TDS requirement.

Tejesh Chitlangi, Partner, IC Legal, said, “Permitting an automatic tax pass through status for Category I and Category II AIFs is a big positive and was a much needed reform for the fund industry. The ambiguity surrounding the tax treatment due to uncertain tax provisions was a big deterrent in fund raising and a clear pass through status is a welcome move.”

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