The government has also allowed foreign investments in alternative investment funds (AIFs), a category of pooled-in investment vehicles for real estate, private equity and hedge funds.
Jaitley said the government would do away with different categories such as foreign portfolio investors (FPI) and foreign direct investment (FDI) to make it easier for overseas investors to invest in AIFs.
AIFs are funds established or incorporated in India for the purpose of pooling in capital from domestic investors for investing according to a pre-decided policy.
“It will help NRI and institutional participation which constitutes a big segment of investors being targeted by the AIF,” said Ajay Garg, MD, Equirus Capital. “But the big challenge on tax treatment to avoid double taxation for investors in AIF has not been addressed.”
“Overseas investors may show interest but it will depend on the fine print whether such investors will get any tax benefit or not,” said Murthy Nagarajan, head, fixed income, Quantum AMC.
Also, the budget proposed a slew of sops for private equity players including ironing out earlier doubts about indirect transfer rules and the implementation of General Anti-Avoidance Rules (GAAR). But the single-most important benefit that private equity (PE) and venture capital (VC) firms would get is that they will not come under the tax net if they have a manager based out of India.
According to tax expert Dinesh Kanabar, if a private equity firm or a venture capital firm has a manager in India it will not be regarded as a permanent establishment and hence the company will not come under the tax net. This will come as a major relief to most of such firms.
On indirect transfer rules, the budget addressed the most ambiguous issue that investors have been grappling with, especially with regard to dividends.
The most-awaited clarification by the Central Board of Direct Taxes is on applicability of indirect transfer provision to dividends paid by foreign companies to shareholders, said Michael Thiemann, CEO of ThyssenKrupp India. “I am confident that this alteration in the Income-Tax Act will eliminate the scope of discretionary exercise of power and provide a hassle-free structure to tax payers. It will further enhance global confidence in India as an ideal investment destination.”