Private equity, venture capital funds get relief from Vodafone-type tax

KR Srivats New Delhi | Updated on January 09, 2018 Published on November 13, 2017

CBDT move follows relief given by Jaitley to Foreign Portfolio Investors in Budget

In a boost to the Alternate Investment Funds (AIF) industry, tax authorities have clarified that non-resident investors investing through multi-layered structures would not be covered under the ambit of “indirect transfer” provisions of the income tax law.

The latest Central Board of Direct Taxes (CBDT) move will allay the concerns of investment funds, including private equity and venture capital funds, which feared multiple taxation of the same income at the time of subsequent redemption or buyback by non-residents in their offshore entities.

Simply put, the CBDT has now said that indirect transfer provisions will not apply in respect of income accruing or arising to a non-resident on account of “redemption or buyback” of its share or interest held indirectly (that is, through upstream entities registered or incorporated outside India).

This regime will be available for all non-resident investors above the level of the direct investor, who is anyway chargeable to tax under the income tax law, the CBDT said.

This benefit will, however, be applicable only in those cases where the proceeds of redemption or buyback arising to the non-resident do not exceed the pro-rata share of the non-resident in the total consideration realised by the specified funds from the said transfer of shares or securities in India, it said.

Gopal Srinivasan, Chairman, Indian Private Equity and Venture Capital Association, said, “This is a hat-trick of boosters to AIFs from SEBI, RBI and CBDT.” He was referring to the RBI’s inclusion of scheduled banks for funding Category II funds upto 10 per cent of their paid-up capital; SEBI extending the pass through to AIF Category I and II funds; and the CBDT clarification.

Rakesh Nangia, Managing Partner, Nangia & Co LLP, a CA firm, said the move would boost the confidence of foreign investors investing through multi-layered structures.

Aseem Chawla, Partner, Phoenix Legal, said the carve-out is only with respect to income earned in the form of either redemption or buyback by a foreign investor. “The concession is available on a pro-rata basis, which suggests that proceeds of redemption or buyback should not exceed the share of the non-resident in the total consideration realised by the fund,” he said.

Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co LLP, a law firm, said that with this, capital gains income (chargeable to tax in India) can be up-streamed in multi-layered investment structures without the fear of double taxation in the hands of the investors.

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Published on November 13, 2017
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