The Hindu Business Line

AIFs bat for par­ity in tax treat­ment with pub­lic mar­ket in­vestors

- KR SRIVATS Business · Tax Credit · Finance · Taxes · Investing · India · Venture Capital

Al­ter­na­tive In­vest­ment Funds (AIFs) should have the same tax rates as pub­lic mar­ket in­vestors — ir­re­spec­tive of whether their ex­its are through listed mar­kets or through pri­vate sale.

This is one of the de­mands that In­dian pri­vate equity and ven­ture cap­i­tal in­dus­try rep­re­sented by IVCA has made to the gov­ern­ment.

Cur­rently, the In­dian in­come tax code adopts a complex and dif­fer­en­ti­ated ap­proach on tax treat­ment of listed and un­listed shares at the hands of AIFs. There is no par­ity on the tax treat­ment be­tween trans­ac­tions done through pri­vate mar­kets and those done through pub­lic mar­kets on as­pects such as what would con­sti­tute longterm or short-term and the rate that would be ap­plied.

When their ex­its are pri­vate, AIFs can end up pay­ing higher taxes than pub­lic mar­ket in­vestors would for the same gains and pe­riod of hold­ing.

This is­sue is un­der­stood to have been raised at the level of Fi­nance Min­is­ter Nirmala Sitharaman dur­ing her re­cent con­sul­ta­tions with rep­re­sen­ta­tives of In­dian pri­vate equity in­dus­try last week, as part of the broad based en­gage­ment with key fi­nan­cial sec­tor play­ers.

Pri­vate equity in­dus­try hon­chos had also pointed out they were ac­tive man­agers of funds and there has been steady an­nual flow of more than $25 bil­lion into the In­dian econ­omy, most of which was pri­mary cap­i­tal for in­vest­ment-led growth.

It was pointed out that pri­vate cap­i­tal has played just an im­por­tant role in eco­nomic devel­op­ment as pub­lic mar­kets, if not more, given the ac­tive en­gage­ment of PE and VC funds in their port­fo­lio com­pa­nies and there was no rea­son to have different tax treat­ments.

“There is no logic for hav­ing a dif­fer­en­ti­a­tion. This gov­ern­ment wants to sim­plify and im­prove ease of in­vest­ing into In­dia. PE & VC play­ers pro­vide risk cap­i­tal and over­lay the cap­i­tal with ac­tive value ad­di­tion in their port­fo­lio com­pa­nies. Also, in most mar­kets of the world, taxes are not dif­fer­en­ti­ated on the ba­sis of pub­lic ver­sus pri­vate sale. The tax treat­ment should be sim­ple and con­sis­tent,” Pad­man­abh Sinha, Chair­man, In­dian Pri­vate Equity and Ven­ture Cap­i­tal As­so­ci­a­tion (IVCA), told Busi­nessLine.

‘Govt re­spon­sive’

Sinha, who man­ages a pri­vate equity busi­ness within the Tata Cap­i­tal fold, was present at the Fi­nance Min­is­ter con­vened meet­ing, and felt the gov­ern­ment seemed en­gaged, con­struc­tive and re­spon­sive on how to energise and re­form the econ­omy to­wards the $5-tril­lion goal.

IVCA has also been mak­ing a case for al­low­ing tax de­ductibil­ity of ex­penses in­clud­ing fund man­age­ment fees dur­ing the com­pu­ta­tion of cap­i­tal gains made by funds. Given the long-term nature of in­vestor com­mit­ments into AIFs, nearly 15 per cent of the cap­i­tal drawn down could go to­wards fees and ex­penses but th­ese are not cur­rently de­ductible for com­put­ing tax when the in­vestor re­alises gains.

Tak­ing the pub­lic mar­ket par­al­lel again, in mu­tual funds, the cap­i­tal gains is com­puted for in­vestors on a NAV ba­sis, post de­duc­tion of fees and ex­penses, un­like in AIFs.

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