Opt for ‘corporate’ structure to avoid additional surcharge: FPIs, AIFs told

K.R.Srivats Delhi | Updated on July 10, 2019 Published on July 10, 2019

PC Mody, Chairman, Central Board of Direct Taxes   -  Twitter/@ficci_india

But experts raise concerns over the suggestion made by PC Mody, Chairman, CBDT

Foreign portfolio investors (FPIs) and alternative investment funds (AIF) could opt to get themselves structured as a ‘corporate’ if they want to avoid paying the additional surcharge introduced in the recent Budget, CBDT Chairman PC Mody suggested on Wednesday.

Addressing a post-Budget conference organised by the Confederation of Indian Industry (CII), Mody said that the basic objective of the levy of surcharge on people with income between ₹2 and ₹5 crore and over ₹5 crore is that these people have the ability to pay and can shell out for the cause of nation-building.

It was not the base rate that was changed, but only the surcharge that was changed, he added.

“As a collateral, it (levy of surcharge) affected the FPIs and AIFs… But there again the option is to go to the corporate structure,” he said.

Read also - Super-rich tax on FPIs: We’ll take it as it comes, says FM

Mody also felt there was no differential treatment and basically the increase in surcharge was to provide benefit to the lower end.“One of the options before us was to go in for increase in basic tax rate. That was not considered to be favourable. In one sentence, I can say that you can’t have your cake and eat it too,” he said.

However, the CBDT Chairman’s suggestion to FPIs and AIFs to structure themselves as ‘corporates’ did not go well with some tax experts and AIF industry honchos. They pointed out that AIFs had opted for the trust route as it provided flexibility and also that this investment vehicle was allowed by market regulator SEBI.

Body blow to hedge funds

The Budget proposal to levy additional surcharge on ‘super rich’ individuals will specifically affect Category-III AIFs (hedge funds), as they are registered as trusts and are not treated as pass through vehicles. It is the trusts which will bear the additional levy, it was pointed out. The levy of 37 per cent surcharge on Category-III AIFs is seen as a body-blow to this industry, whose total AUM, according to SEBI is about ₹42,000 crore.

Reacting to the CBDT Chairman’s suggestion that FPIs and AIFs could opt for a ‘corporate’ structure, Vaibhav Sanghavi , co-CEO, Avendus, said that transitioning from a trust to a body corporate is operationally not feasible.“We are hopeful to have the situation rectified for the survival of the AIF Category-III industry,” Sanghavi told BusinessLine.

Sanghavi also highlighted that AIF Category-III has been an active participant to the disinvestment programme to an extent of 10 per cent on CPSE and Bharat-22. “What we would recommend is to exempt SEBI-registered investment vehicles from this increased surcharge,” he said.

Straight-jacket approach

Aseem Chawla, Managing Partner, ASC Legal, said that it would not be very apt to suggest a straight-jacket approach that FPIs ought to prefer itself getting structured only as a company. “There are a whole host of reasons which determine the form of an entity — legal, regulatory, ease of winding up, etc,” he said.

Amit Maheshwari, Partner, Ashok Maheshwary & Co LLP, said that the surcharge is applicable to non-corporate entities and quite a few foreign portfolio investors are organised as trusts. Being organised as a trust has several advantages over other structures, he said.


Published on July 10, 2019
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