The Central Board of Direct Taxes (CBDT) has today clarified that differential regime between domestic investors including investors of AIF category III and FPIs existed prior to the General Budget 2019.
This has come in the wake of media reports, which said that the government has created differential regime between domestic investors of AIF category III and FPIs. In a press release, the CBDT said, “Dispelling this false impression being created in certain sections of media including social media, CBDT said that differential regime between domestic investors (including AIF category III) and FPIs existed even prior to the General Budget 2019 and was therefore not the creation of the Finance (No. 2) Act, 2019 or the announcement made by the Finance Ministry on 23rd August 2019.”
Last week, Union Finance Minister Nirmala Sitharaman announced that investors of futures and options would not get exemption of withdrawal of enhanced surcharge. However, FPIs investing in futures and options would get exemption from enhanced surcharge even if they invest in futures and options.
Experts pointed out that most investors of category III AIFs would get benefits of lower tax rates. Currently, there are 117 funds under Category III AIFs. Of these, 95 funds are long only funds. Since long only funds deal with cash markets, investors in long only funds will be eligible for lower tax rates.
Further, 12 funds in the industry follow long short strategy i.e. combination of both cash and derivatives. Hence, investors in these funds will get partial benefits i.e. benefits only to the extent of equity exposure through cash markets. Nearly 10 funds, which are purely hedge funds, will not get any benefits as these funds deal with derivatives. Overall, over 95% of category III AIFs will benefit from the latest move.