INDIA Law and Practice Contributed by: Tejesh Chitlangi, Sushreet Pattanayak, Pooja Mehta and Anita Jain, IC Universal Legal
the fund, meaning the fund’s exposure should not exceed twice its net asset value. GIFT Funds Venture Capital Schemes and Restricted Schemes are permitted to undertake borrowings without restriction, with the consent of investors and appropriate disclosures in PPM. Any change to the terms would require the consent of two- thirds of the investors by value. Retail Schemes are permitted to borrow up to 20% of assets under management (AUM) for six months only to meet temporary liquidity needs for the purposes of redemption. 2.6 Tax Regime Domestic AIFs The Income-tax Act, 1961 (“IT Act”) is the statute governing income taxes in India, and provides for a tax pass-through status to Category I and II Domestic AIFs – ie, their income is directly tax - able in the hands of their investors as though it were received by or was accruing to them had they invested directly in the underlying securi - ties. The tax pass-through status applies to all income earned by Domestic AIFs apart from income taxable under the heading “Profits and gains of business or profession”. This business income is taxable at the maximum marginal rate applicable in that financial year and due by the Domestic AIF. Thereafter, this business income is tax-exempt for investors. Category III Domestic AIFs are not granted the above pass-through status under the IT Act. However, if they are set up as trusts, they can be structured for tax transparency if the general principles of trust taxation and other provisions of the IT Act are applied.
Non-resident investors are eligible to claim the benefits of a double-taxation avoidance agree - ment, or Tax Treaty, entered into between their country of residence and India. The provisions of the Tax Treaty would supersede the provisions of the IT Act if they are more beneficial than the provisions of the latter, subject to other require - ments and customary substance requirements. Where investors are from countries with which India does not have a Tax Treaty, the provisions of the IT Act will continue to apply. GIFT Funds GIFT Funds in the nature of Category I and Category II AIFs have been accorded a pass- through status similar to Domestic AIFs. Busi - ness income is eligible for a 100% tax holiday for ten years within the first 15 years. Non-resi - dent investors enjoy tax exemption on offshore income made through GIFT Funds, and are not required to obtain a PAN or file a tax return in India. Losses (except for business losses) can be passed through to investors, provided units are held for 12 months or more. Investors are also eligible to claim benefits (if any) under the appli - cable double taxation avoidance agreements. GIFT Funds are taxed at fund level, with exemp - tions for non-resident investors on income aris - ing from the transfer of securities (other than the shares of Indian companies) such as deriva - tives, debt securities, offshore securities, mutual funds and specified securities listed on the IFSC exchanges. FMEs enjoy a 100% corporate tax holiday for ten years within the first 15 years, reduced Minimum Alternate Tax/Alternate Minimum Tax rates and GST exemption on services provided to GIFT Funds.
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