The growth of Venture Capital (VC) in India can be attributed to a host of factors, chief among them being a need to bridge the gap between capital requirements of fast-growing companies and funding available from traditional sources such as banks, IPOs, etc. As the value of such funding grew, the SEBI in 2012 introduced the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) with an aim to recognizing AIFs as a distinct asset class and promoting the start-up culture in India.
Taxation of AIFs
AIFs can be classified into three broad categories based on the assets that the fund invests in and the investment strategies that they adopt. In an attempt to ensure fiscal neutrality, it is a common practice globally to accord such funds a tax pass through status.
What is Tax pass status?
What this essentially means that income accruing from such funds is taxed at the investor and not the fund level. This becomes especially relevant when the income might be liable to tax at the fund level but might be tax free at an individual investor level.
In India, the Category I and Category II AIFs registered with the SEBI have been accorded a pass through status, with a requirement to subject any income credited or paid by the AIFs to a withholding tax of 10% for resident investors and as per the “rates in force” for non-resident investors.
The Category III AIF has still not been accorded a pass through status, which means that income from such funds will be taxed at the investment fund level and the tax obligation will not pass through to the unit- holders. In cases where the income of the fund is characterized as income under the head “Profits or gains from business or profession”, the investment fund would be taxed in respect to such income at the maximum marginal rate of tax.
Past performance is not an indication of future performance. Investments in the securities market are subject to market risk.
Please read the Private Placement Memorandum carefully before investing.
Please consult your Tax consult for Taxation related queries.