In its budget wishlist, SEBI has requested finance ministry to relax taxation norms for the category III alternative investment funds i.e. hedge funds.
A few media reports say that SEBI has recommended the ministry to accord the pass through status to hedge funds i.e. unit based taxation. Currently, the investment in category III AIF has not been accorded a pass through status, which means that income from such funds is taxed at the investment fund level and the tax obligation doesn’t pass through to the unit- holders.
If approved, the hedge fund investors will get equity tax structure i.e. tax exemption after one year.
Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital says if this proposal gets through, it will encourage many foreign players to open up AIF business in India. “Currently, the hedge fund managers are liable to pay taxes on behalf of investors. At times, it results in double taxation, which is not viable.”
Gupta further said that SEBI wants hedge funds to be treated like mutual funds in terms of taxation. “The move will reduce the confusion among investors. In addition, by making it unit based taxation, the income tax department can keep a track on the history of investments and taxation of individuals.”
SEBI defines category III as AIFs that employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.