India budget gives PE funds tax pass-through status

In a 90-minute budget speech made on Saturday, Finance Minister Arun Jaitley announced that all alternative investment funds (AIFs) under category I - which includes infrastructure vehicles - and category II funds - which include sector-specific and sector-agnostics funds - will be included in the reform.

This means that dividends from vehicles classified as such will not be taxed at the fund level; meaning the tax liability will simply flow through to the limited partners. Category III funds - which includes hedge funds - will not receive pass-through status.

The change represents a significant win for the industry, which listed pass-through status for AIFs among its key priorities for this year's budget.

In addition, Jaitley also announced the deferment of taxation under the controversial General Anti Avoidance Rule (GAAR) by two years. The rule was originally promulgated by the Indian government in 2012 to crack down on investors who use treaty jurisdictions for tax avoidance rather than business purposes.

The rule has caused concern within the investor community, particularly because of the lack of clarity it offered over the taxation of private equity funds.

Steps have also been taken on the taxation of real estate investment trusts (REITs) and infrastructure investments trusts (INViTs). Provisions include the exemption of long term capital gains tax on disposal of units, and pass through status for REITs with respect to rental income from trust-owned assets.

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• Topics
• South Asia
• Regulation
• regulation
• SEBI