AIFs bat for parity in tax treatment with public market investors

KR Srivats New Delhi | Updated on August 12, 2019 Published on August 12, 2019

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Alternative Investment Funds (AIFs) should have the same tax rates as public market investors — irrespective of whether their exits are through listed markets or through private sale.

This is one of the demands that Indian private equity and venture capital industry represented by IVCA has made to the government.

Currently, the Indian income tax code adopts a complex and differentiated approach on tax treatment of listed and unlisted shares at the hands of AIFs. There is no parity on the tax treatment between transactions done through private markets and those done through public markets on aspects such as what would constitute long-term or short-term and the rate that would be applied.

When their exits are private, AIFs can end up paying higher taxes than public market investors would for the same gains and period of holding.

This issue is understood to have been raised at the level of Finance Minister Nirmala Sitharaman during her recent consultations with representatives of Indian private equity industry last week, as part of the broad based engagement with key financial sector players.

Private equity industry honchos had also pointed out they were active managers of funds and there has been steady annual flow of more than $25 billion into the Indian economy, most of which was primary capital for investment-led growth.

It was pointed out that private capital has played just an important role in economic development as public markets, if not more, given the active engagement of PE and VC funds in their portfolio companies and there was no reason to have different tax treatments.

“There is no logic for having a differentiation. This government wants to simplify and improve ease of investing into India. PE & VC players provide risk capital and overlay the capital with active value addition in their portfolio companies. Also, in most markets of the world, taxes are not differentiated on the basis of public versus private sale. The tax treatment should be simple and consistent,” Padmanabh Sinha, Chairman, Indian Private Equity and Venture Capital Association (IVCA), told BusinessLine.

‘Govt responsive’

Sinha, who manages a private equity business within the Tata Capital fold, was present at the Finance Minister convened meeting, and felt the government seemed engaged, constructive and responsive on how to energise and reform the economy towards the $5-trillion goal.

IVCA has also been making a case for allowing tax deductibility of expenses including fund management fees during the computation of capital gains made by funds. Given the long-term nature of investor commitments into AIFs, nearly 15 per cent of the capital drawn down could go towards fees and expenses but these are not currently deductible for computing tax when the investor realises gains.

Taking the public market parallel again, in mutual funds, the capital gains is computed for investors on a NAV basis, post deduction of fees and expenses, unlike in AIFs.

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Published on August 12, 2019
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