The private equity and venture capital industry is batting for parity in terms of capital gains tax and holding periods between unlisted and listed securities.
The listed shares are considered long term if held for more than 12 months. For unlisted shares this period is 24 months. Short term capital gains for listed shares are taxable at 15%, and at slab rates for unlisted shares.
There is more rupee capital needed for the PE/VC funds, said Siddarth Pai, founder, 3one4 Capital.
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“There are artificial barriers baked into Indian laws that prevent domestic institutions from investing in Indian AIFs. Giving optionality to such institutions will help them achieve superior returns and diversification, while giving scale to AIFs and rupee capital participation,” he said, adding that Sebi had taken a number of steps to make AIFs more transparent.
There is a need for recognition of AIF operations in Indian laws as the current laws were created before the AIF regime was conceived. For example, assessing a limited partnership statute or an investment trust law to bring the Indian statutory framework at par with global standards.
While the alternative investment industry is growing at a fast pace, there is no statutory framework for merger and/or restructuring of AIFs and InvITs as these funds operate under the Indian Trusts Act of 1882 which does not cater to realities of the funds industry, said Khan.
Last year, a ruling by the Bangalore bench of the Custom, Excise and Service Tax Appellate Tribunal held that a venture capital fund set up as a trust is a separate legal entity and upheld the levy of service tax on carried interest distributed by the VCF, equating it to performance fee earned by the management company. This, according to Pai, was the result of gaps in the existing service tax regime.
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The industry wants an extension of deemed export status for fund management services rendered to onshore AIFs.
Investment management fees constitute 2-3% of the value of the assets managed in an AIF per year. The fees charged to a VC/PE fund located in an offshore jurisdiction are exempt from GST.
However, India-domiciled AIFs managed by Indian fund managers are considered taxable for GST purposes, even if they pool the same overseas money. Since an AIF is only a pooling vehicle for investments and does not provide any service, there is no output GST liability, and it is not able to utilise input tax credit of GST.
Thus, the incremental tax of 18% becomes an additional cost for the foreign investors in the AIF, who would otherwise have been entitled to an export/zero-rated status and wouldn’t have to pay taxes on the management fees paid.