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Tax Pass Through For AIFs: A Vexed Issue

Published on Wed, Oct 23,2013 | 18:12, Updated at Wed, Oct 23 at 18:12Source : 

By: Bijal Ajinkya & Abhay Sharma, Khaitan & Co.

About a year ago the Securities Exchange Board of India (SEBI) introduced the Alternate Investment Fund Regulations, 2012 (AIF Regulations), which replaced the erstwhile SEBI (Venture Capital Fund) Regulations, 1996 (VCF Regulations). The aim was to bring a regulation that encompassed all forms of private equity and also introduced a regime interalia for the formation of fund of funds, domestic hedge funds.

According to some experts, the AIF Regulations herald the beginning of the next phase of evolution of the domestic private equity industry in India. As is the case with most legislation/regulations, the AIF Regulations do not exist in vacuum and in order to achieve its objectives, it is imperative that there is an element of synchronization between such other legislation and the AIF Regulations. The ncome Tax Act, 1961 (Act) is a case in point, wherein Section 10 (23FB)1 affords a “tax pass though” to all Venture Capital Funds (VCF) registered under the erstwhile VCF Regulations, whereas in the case of AIFs the pass through has only been extended to a certain sub category of category- I AIFs and that too with additional conditions and riders.

This limited extension of benefits could either be a result of legislative oversight or a deliberate change in tax policy or a combination of both. The purpose behind this article is to identify the types of AIFs that can avail of this tax pass through benefit and also point out certain lacunae under the existing tax pass through provisions.


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