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The Indian Private Equity and Venture Capital Association (IVCA) has pitched for a pass-through tax regime even for the losses incurred at the Alternative Investment Fund (AIF) level, stating that such losses should be available for set-off to AIF’s investors.
Similar to the pass-through for income, which has already been allowed, the losses incurred by Category I and Category II AIFs, under any head of income, should also be allowed to be passed on to investors, said the White Paper on venture capital industry, submitted to Department for Industrial Policy and Promotion Secretary Ramesh Abhishek here on Tuesday.
“A pass-through tax regime should not distinguish between gains and losses. Allowing tax pass through even for losses will ensure that tax has been levied on the ‘real income; of investors,” Rajat Tandon, President, IVCA, told BusinessLine .
He also said most of the countries have allowed pass-through of losses at the level of AIFs. Tandon also felt that allowing tax pass through for losses (at AIF level) will spur AIF activity in the country.
He said the present tax regime for Category I and II AIFs provides for pass-through of income earned by the AIF. However, losses (net) are retained at the fund level without the facility of it being allowed as set-off at the investors level. Category I and II AIFs are close ended funds whose tenure would typically extend to 10 years.
Practically, it is observed that in a fund, usually the profitable investments of the fund are first sold, while the relatively lesser performing investments may be sold towards the end of the fund’s life.
Losses incurred
Unabsorbed losses cannot be utilised by AIF if incurred towards end of fund life or if sufficient gains are not earned by the AIF subsequent to losses being incurred or where gains realised are exempt under Section 10 (38) of the Income Tax law.
Net losses incurred by AIFs are not available to investors and may lapse if not allowed to be set off by the AIF investors, he said.
Under the AIF regulations, AIFs are permitted to invest their un-invested funds only in liquid mutual funds due to the risk of capital erosion and possibility of entry/exit load on investments/exits in other types of mutual funds.
With the growth of the mutual funds industry, various debt schemes of mutual funds seek to provide capital protection and better returns than liquid schemes of mutual funds.
Moreover, as investments in debt schemes of mutual funds are for longer time periods, there are tax benefits that may accrue to AIF as compared to liquid schemes.
Therefore, if the un-invested portion of investible funds of AIF is permitted to be invested in such debt schemes of mutual funds, the investor would get better return on the capital, said the IVCA White Paper.
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