You are on page 1of 22

BUSINESS TRUST

S.2[(13A) of ITA, 1961 defines "business trust" means a trust registered as,—

(i) an Infrastructure Investment Trust under the Securities and Exchange Board of India
(Infrastructure Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board
of India Act, 1992 (15 of 1992); or

(ii) a Real Estate Investment Trust under the Securities and Exchange Board of India (Real Estate
Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act,
1992 (15 of 1992), and

the units of which are required to be listed on recognized stock exchange in accordance with the
aforesaid regulations;]

BUSINESS TRUST UNDER SEBI PROVISIONS

Regulation-4 of SEBI (REIT ) Regulations, 2014

(1) For the purpose of the grant of certificate to [the trust], the Board shall consider all matters
relevant to the activities.

(2) Without prejudice to the generality of the foregoing provision, the Board shall consider the
following, namely,—

(a)the applicant is a[the sponsor on behalf of] trust and the instrument of trust is in the form of a
deed duly registered in India under the provisions of the Registration Act, 1908;

(b) the trust deed has its main objective as undertaking activity of REIT in accordance with these
regulations and includes responsibilities of the Trustee in accordance with regulation 9;

(c)persons have been designated as sponsor(s), manager and trustee under these regulations and all
such persons are separate entities;

TRUST UNDER INDIA TRUST ACT, 1882

The Act defines the term 'trust' in Section 3 as

(i) an obligation annexed to the ownership of property and

(ii) arising out of confidence reposed in and

(iii) accepted by the owner or declared and accepted by him,

(iv) for the benefit of another or of another and the owner. '.

SPECIFICS OF A TRUST DEED

• The person who reposes or declares the confidence is called the 'author of the trusts',

• the person who accepts the confidence is called the 'trustee',

• the person for whose benefit the confidence is accepted is called the 'beneficiary';

• the subject matter of the trust is called 'trust property' or 'trusts money';

• the 'beneficial interest' is beneficiary's right against the trustee as owner of the trust
property;
• and the instrument declaring the trust is called the 'instrument of trust

INGREDIENTS OF VALID TRUST

Section 4 of the Indian Trust Act provides that purpose of a trust is lawful unless it is:

(a) forbidden by law, or

(b) is of such a nature which will defeat the provisions of any law, or

(c) is fraudulent, or

(d) involves or implies injury to the person or property of another, or

(e) the Court regards it as immoral or opposed to public policy.

Thus a trust which does not fall in any of the above prohibitions, is deemed to be for lawful purpose.

WHO CAN CREATE A TRUST?

• Every person who is competent to contracts which includes an individual, AOP, HUF,
company etc.

• If a trust is to be created by on or behalf of a minor, then the permission of a Principal Civil


Court of original jurisdiction is required.

WHICH ARE THE TYPES OF TRUSTS THAT CAN BE CREATED?

• Private Trusts: A private trust is for a closed group. In other words, the beneficiaries can be
identified. Eg: A trust created for the relatives and friends of the author.

• Public Trusts: A public trust is created for a large group ie. the public in large. Eg: Non-
Profit NGO’s Charitable Institutions for the general public.

**All structured funds are governed by Indian Trust Act, 1882 being private in nature.
0

CLASSIFICATION OF TRUST

Determinate Trust Indeterminate Trust

• trusts are considered to be • whereas in case of an indeterminate


determinate if the individual shares of trust, tax is charged on the entire
the beneficiaries are expressly stated income of the trust at the maximum
in the trust deed and are identifiable marginal rate ("MMR").
and ascertainable as on the date of the
• The trustee shall be charged @MMR
trust deed.
on entire income or part of income
• In case of a determinate trust, tax is which is indeterminable.
charged in the hands of the trustees in
the capacity of a representative
assessee qua each beneficiary,

• Taxation as per sec 164(1) or 164(1A) As per S. 164(1)


Discretionary Trust Specific Trust

• A discretionary trust is a trust whose • A trust where the distributed sum is


income is not specifically receivable on specific along with right and liability of
behalf or for the benefit of any one each party.
person or wherein the individual
shares of the beneficiaries are
unknown or at discretion of trustee.

• Taxable as indeterminate trust [S. 164] • Taxable under provision of S.161(1) or


161(1A)

EXCEPTIONS TO S.164

• IN the following cases irrespective of share being indeterminate the income shall be charged
as income of AOP:

(a) If none of the beneficiaries has any other income chargeable under this Act exceeding the
maximum amount not chargeable to tax in the case of an [association of persons] or is a beneficiary
under any other trust; or]

(b) the relevant income or part of relevant income is receivable under [a trust declared by any
person by will and such trust is the only trust so declared by him];

(c) the relevant income or part of relevant income is receivable under a trust created before the 1st
day of March, 1970, by a non-testamentary instrument and AO thinks it as bonafide and for family
affairs.

(d) the relevant income is receivable by the trustees on behalf of a provident fund, superannuation
fund, gratuity fund, pension fund or any other fund created bona fide.
TAXATION OF AOP VS TRUST

Status of Taxation of AOP Taxation of Trust


Entity

Determinate Section 67A – Relating to S.161, Representative


Entity method of computing a Capacity
member’s share in the income
of an AOP or BOI

Section 86. Share of member of


an association of persons or
body of individuals in the
income of the association or
body.

Indeterminate Section 167B – Relating to S.164 Provision


Entity charge of tax where shares of excluding exceptions
members in an AOP or BOI are
unknown, etc.

DIRECT ASSESSMENT OR RECOVERY NOT BARRED. [S.166]

• 166. Nothing in the foregoing sections in this Chapter shall prevent either the direct
assessment of the person on whose behalf or for whose benefit income therein referred to
is receivable, or the recovery from such person of the tax payable in respect of such income.

COMMISSIONER OF INCOME TAX, GUJARAT, AHMEDABAD


VS.KAMALINI KHATAU

• whether Revenue has option to assess and to recover tax from either trustees or
beneficiaries of discretionary trust when income thereof is distributed and received by
beneficiaries in accounting year?

IN RE:[1996] 89 TAXMAN 125 (AAR) TATA AIG


Specific details…

• IM was to be helped by various other bodies like Investment Committee [where 4 reps were
appointed by the US CO an 3 Rep including chairman by Indian financial entity ], Advisory
Board and the Investment Advisors but these bodies could in no way control the decision of
the board.

• US Company had veto power on the decisions.

Indenture of Trust: specifications

• The trust deed gave absolute discretion to the trustee to add names of any beneficiaries.

• The beneficiaries were to be entitled to distribution of profits of Contributory Trust (CT)


proportionate to their contribution of fund to CT.

• Trustee had power to apportion the expenses, tax and other liability either from the income
or the capital fund.

Questions framed by the AAR

• whether the applicant would be assessed in respect of its proportionate share of income
earned by the contributory trust as per the provision of section 161 of the Income Tax Act,
1961 (the Act) ?

• Based on the facts and circumstances of the case, whether the contributory trust would be
regarded as a 'see through' or 'transparent entity' vis-a-vis the applicant?

• Based on the facts and circumstances of the case, if it is held that the provisions of section
161 do not apply to the income of the applicant from the contributor)' trust because of the
power vested in the trustees to add to the list of the beneficiaries on the terms laid down in
the indenture of trust and the contribution agreement, then if such power is deleted, would
the assessment of the applicant in respect of its proportionate share of income of the trust
be made in accordance with section 161 ?

• Based on the facts and circumstances of the case, will there be any tax withholding by the
investee companies at the time of distribution of income to the CT ?

• Whether on the facts and circumstances of the case, the character of the applicant's
proportionate share in the income of the contributory trust will be same as in the hands of
the contributory trust ?

• Whether on the facts and in the circumstances of the case, the applicant's share in the
contributory trust will be chargeable to tax following cases?

(a) Capital Gain

(b) Dividend

(c) Interest income


Revocable Trust Irrevocable Trust

A revocable trust is one where the The terms of an irrevocable trust, in contrast, are
author can modify the terms or set in stone the minute the agreement is signed.
conditions of a trust at any time. All a Except under exceedingly rare circumstances, no
author has to do is file a trust changes may be made to an irrevocable trust.
amendment to make any revisions he
or she feels warranted. The author
can also change the beneficiaries of a
revocable trust at any time.

Taxation under provision of S.61 to Taxation under S. 161 to 164


S.63

ADEQUACY OF CONSIDERATION.

• Amount received by a person as beneficiaries on dissolution of trust cannot be termed to be


an amount received 'without consideration' and, hence, no addition could be made.

• Acceptance of trusteeship and unilateral transfer of benefit in favor of beneficiary is


adequate.
ALTERNATE INVESTMENT FUND

AIF DEVELOPMENT JOURNEY

SEBI approved the regulations and on May 21, 2012, notified the SEBI (Alternative Investment
Funds) Regulations, 2012 [the “AIF
Significant change in regulating Asset Class and its investment
Covers strategies looming between various regulations
Used the erstwhile regime of VCF as base to expand its horizons
Omnibus regulations to cover domestic unregistered fund

ERSTWHILE REGIME

• In the Indian context there were five major heads of Regulations


• SEBI (Mutual Fund) Regulations
• SEBI (Collective Investment Scheme)Regulations
• SEBI (Venture Capital Regulations)
• SEBI (Portfolio Management ) Regulations
• SEBI (Foreign Venture Capital ) Regulations

ANALYSIS OF THE AIF REGULATIONS:


Regulation 2 (1) (b) defines “Alternative Investment Fund” as:
Alternate Investment Fund means any fund established or incorporated in India in the form of a
trust or a company or a limited liability partnership or a body corporate which,-
(i) is a privately pooled investment vehicle which collects funds from investors, whether Indian
or foreign, for investing it in accordance with a defined investment policy for the benefit of
its investors; and
(ii) is not covered under the Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes)
Regulations, 1999 or any other regulations of the Board to regulate fund management
activities”

NON APPLICABILITY OF AIF REGULATIONS:

Further, by way of a proviso to the above definition, the following have been kept out of the purview
of the definition of AIF:
• Family trusts set up for the benefit of relatives‘ as defined under Companies Act, 1956;
• ESOP Trusts set up under the Securities and Exchange Board of India (Employee Stock
Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999 or as permitted
under Companies Act, 1956;
• Employee welfare trusts or gratuity trusts set up for the benefit of employees;
• “Holding Companies” within the meaning of Section 4 of the Companies Act, 1956;
• Other special purpose vehicles not established by fund managers, including securitization
trusts,
• Any such pool of funds which is directly regulated by any other regulator in India.

OTHER DEFINITIONS:

(q) manager‖ means any person or entity who is appointed by the Alternative Investment Fund to
manage its investments by whatever name called and may also be same as the sponsor of the Fund;
(w) sponsor‖ means any person or persons who set up the Alternative Investment Fund and includes
promoter in case of a company and designated partner in case of a limited liability partnership;
(o) investee company‖ means any company, special purpose vehicle or limited liability partnership or
body corporate in which an Alternative Investment Fund makes an investment;
(aa) venture capital undertaking‖
- a domestic company – unlisted - engaged in the business for providing services, production or
manufacture of article or things
Excludes: non-banking financial companies; gold financing; activities not permitted under
industrial policy of Government of India;
(z) ―venture capital fund‖ means an Alternative Investment Fund which invests primarily in unlisted
securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new
products, new services, technology or intellectual property right based activities or a new business
model;
(r) ―private equity fund‖ means an Alternative Investment Fund which invests primarily in equity or
equity linked instruments or partnership interests of investee companies according to the stated
objective of the fund;
AIF REGULATIONS – CATEGORIES OF AIF

• CATEGORY I

• Invests in start up enterprise.

• AIFs with positive spillover effects on the economy

• Incentives given by SEBI, GOI, or other regulators in India

• Under the AIF Regulations, the following funds are designated as sub- categories of
Category I AIFs - venture capital funds, SME funds, social venture funds,
infrastructure funds

• SEBI introduced ‘angel investment funds’ as a sub-class of the venture capital fund
sub- category.

• CATEGORY II

• Does not fall in cat I or III and does not undertake leverage.

• No incentives given by SEBI, GOI, or other regulators in India

• CATEGORY III

• AIFs which trade for making short term returns

• Employs diverse or complex trading strategies may employ leverage

• Investment in listed or unlisted securities

• Open ended scheme

INVESTMENT CONDITIONS AND RESTRICTIONS UNDER THE AIF REGULATIONS

• The AIF Regulations prescribes certain general restrictions which are applicable on each type
of AIF.
• It also prescribes certain specific restrictions for each class of AIF.

GENERAL RESTRICTIONS UNDER THE AIF REGULATIONS

• AIFs may invest in securities of companies incorporated outside India subject to such
conditions / guidelines that may be stipulated by SEBI or the RBI;
• Co-investment in an investee company by a Manager / Sponsor should not be on more
favorable terms than those offered to the AIF;
• Only a specific percentage of the investible funds (25% for Category I and II AIFs and 10%
for Category III AIFs) can be invested in a single investee company;
• AIFs should not invest in associates except with the approval of 75% of investors by value of
their investments in the AIF;
• The un-invested portion of the investible funds may be invested in liquid mutual funds or
bank deposits or other liquid assets of higher quality till deployment of fund.
SPECIFIC RESTRICTIONS FOR AIF CATEGORY-I

i. Category I AIFs shall invest in investee companies or in VCU, SPV, LLP or in units of other
AIFs specified in the Regulations.
ii. It needs to be a close ended scheme with specified tenure
iii. A Category I AIF of a particular sub-category may invest in the units of the same sub-
category of Category I AIFs.
However, this investment condition is subject to the further restriction that Category I AIFs are not
allowed to invest in the units of Fund of Funds.
iv. Category I AIFs shall not borrow funds directly or indirectly or engage in leverage
except for meeting temporary funding requirements for more than 30 days, on not more than four
occasions in a year and not more than 10% of its investible funds.

VENTURE CAPITAL FUND R.2(1)(Z)

“venture capital fund” means an Alternative Investment Fund which invests primarily in-
(i) unlisted securities of start-ups, emerging or;
(ii) early-stage venture capital undertakings mainly involved in new products,
(iii) new services, technology or intellectual property right based activities or;
(iv) a new business model [and shall include an angel fund as defined under Chapter III-A]
venture capital undertaking” means a domestic company:
(i) which is not listed on a recognized stock exchange in India at the time of making investment; and
(ii) which is engaged in the business for providing services, production or manufacture of article or
things.
It does not include-
(a) NBFC
(b) Gold Loan
(c) Sectors restricted by industrial policies.
SPECIFIC RESTRICTION ON VCF

At least 2/3rd of corpus Remaining 1/3rd of corpus

unlisted equity shares or equity • subscription to IPO of a VCU whose shares are proposed
linked instruments of a VCU or in to be listed
companies listed or proposed to be
listed on a SME exchange or SME • debt or debt instrument of a VCU in which the fund has
segment of an exchange. already made an investment
• preferential allotment of equity shares or equity linked
instruments of a listed company subject to lock in period
of one year
• the equity shares or equity linked instruments of a
financially weak company or a sick industrial company
whose shares are listed;
• SPV

SME FUND R.2(1) (T)

“SME fund” means an Alternative Investment Fund which invests primarily in unlisted securities
of investee companies which are SMEs or securities of those SMEs which are listed or proposed to
be listed on a SME exchange or SME segment of an exchange;
.

Status Investment in P&M Service Industry

Micro below Rs 25 lakh upto Rs 10 lakh

Small between Rs 25 lakh and Rs 5 10 lakh to Rs 2 crore


crore
Medium from Rs 5 crore to Rs 10 crore 2 crore to Rs 5 crore

SPECIFIC RESTRICTIONS FOR SME FUND INVESTMENT R.16(3)

• at least seventy five percent of the corpus shall be invested in unlisted securities or
partnership interest of VCU or investee companies which are SMEs or in companies listed or
proposed to be listed on SME exchange or SME segment of an exchange;
• such funds may enter into an agreement with merchant banker to subscribe to the
unsubscribed portion of the issue or to receive or deliver securities in the process of market
making under Chapter XB of the ICDR.
.

SOCIAL VENTURE FUND R.2(1) (V)


“social venture fund” means an Alternative Investment Fund which invests primarily in securities or
units of social ventures and which satisfies social performance norms laid down by the fund and
whose investors may agree to receive restricted or muted returns;
. ** where, “social venture” means a trust, society or company or venture capital undertaking or
limited liability partnership formed with the purpose of promoting social welfare or solving social
problems or providing social benefits and includes public charitable trust, section-8 companies and
micro finance entities.

SPECIFIC RESTRICTIONS FOR SOCIAL VENTURE FUND INVESTMENT R.16(4)

i. At least seventy five percent of the corpus shall be invested in unlisted securities or
partnership interest of social ventures.
ii. such funds may accept grants, provided that such utilization of such grants shall be restricted
to clause (a).
iii. such funds may give grants to social ventures, provided that appropriate disclosure is made in
the placement memorandum.

SPECIFIC RESTRICTIONS FOR INFRASTRUCTURE INVESTMENT FUND R.16(5)

i. At least seventy five percent of the corpus shall be invested in unlisted securities or units or
partnership interest of venture capital undertaking or investee companies or special purpose
vehicles, which are engaged in or formed for the purpose of operating, developing or holding
infrastructure projects;
ii. Notwithstanding clause (a) of sub-regulation (5), such funds may also invest in listed
securitized debt instruments or listed debt securities of investee companies or special
purpose vehicles, which are engaged in or formed for the purpose of operating, developing or
holding infrastructure projects.
.
SPECIFIC RESTRICTIONS FOR CAT- II AIF R.17

i. Category II AIFs shall invest primarily in unlisted investee companies or in units of other AIFs as
may be specified in the placement memorandum;
ii. Category II AIFs may invest in the units of Category I and Category II AIFs. This is subject to the
restriction that Category II AIFs cannot invest in the units of Fund of Funds;
iii. Category II AIFs shall not borrow funds directly or indirectly or engage in leverage except for
meeting temporary funding requirements for more than thirty days, on not more than four occasions in
a year and not more than 10% of its investible funds;
iii. Category II AIFs may engage in hedging subject to such guidelines that may be prescribed by
SEBI;

SPECIFIC RESTRICTIONS FOR CAT- II AIF R.17

v. Category II AIFs may enter into an agreement with a merchant banker to subscribe to the
unsubscribed portion of the issue or to receive or deliver securities in the process of market making
under Chapter XB of the ICDR Regulations; and
vi. Category II AIFs shall be exempt from Regulations 3 and 3A of the Insider Trading Regulations in
respect of investments in companies listed on SME exchange or SME segment of an exchange
pursuant to due diligence of such companies.
**This is subject to the further conditions that the AIF must disclose any acquisition / dealing within 2
days to the stock exchanges where the investee company is listed and such investment will be locked
in for a period of 1 year from the date of investment.

SPECIFIC RESTRICTIONS FOR CAT- III AIF [R.17]

i. Category III AIFs may invest in securities of listed or unlisted investee companies or derivatives or
complex or structured products;
ii. Category III AIFs may invest in the units of Category I, Category II and Category III AIFs. This is
subject to the restriction that Category III AIFs cannot invest in the units of Fund of Funds;
iii. Category III AIFs engage in leverage or borrow subject to consent from investors in the fund and
subject to a maximum limit as may be specified by SEBI; and
iv. Category III AIFs shall be regulated through issuance of directions by SEBI regarding areas such
as operational standards, conduct of business rules, prudential requirements, restrictions on
redemption and conflict of interest.

ANGEL INVESTMENT FUND: REGISTRATION AND OTHER REQUIREMENT

ANGEL FUND CH-IIIA [R.19A]

S. 19A (1) - “angel fund” means a sub-category of VCF under Category I- AIF that raises funds from
angel investors and invests in accordance with the provisions of this Chapter.
(2) "angel investor" means any person who proposes to invest in an angel fund and satisfies one of
the following conditions, namely,
(a) an individual investor who has net tangible assets of at least 2 Cr. excluding value of his
principal residence, and who:
(i) has early stage investment experience, or
(ii) has experience as a serial entrepreneur, (promoted or co-promoted more than one start-up
venture) or
(iii) is a senior management professional with at least ten years of experience
(b) a body corporate with a net worth of at least 10 Crore rupees; or
(c) an AIF registered under these regulations or a VCF registered under the SEBI (Venture Capital
Funds) Regulations, 1996.

INVESTMENT IN ANGEL FUNDS [R.19D].

(1) Angel funds shall only raise funds by way of issue of units to angel investors.
(2) An angel fund shall have a corpus of at least ten crore rupees.
(3) Angel funds shall accept, up to a maximum period of five years, an investment of not less than
twenty five lakh rupees from an angel investor.
(4) Angel fund shall raise funds through private placement by issue of information memorandum or
placement memorandum, by whatever name called.
[2018 amend.- Provided that the provisions of the Companies Act, 2013 shall apply to the Angel
Fund, if it is formed as a company.]

LAUNCH OF SCHEME [R.19E]


(i) The angel fund may launch schemes subject to filing of a term sheet with the Board
containing material information regarding the scheme, in the format and time period as may
be specified by the Board.]
(ii) No scheme of the angel fund shall have more than [two hundred] angel investors.

INVESTMENT BY ANGEL FUNDS. [R.19F]

(i) Angel funds shall invest in venture capital undertakings which complies with G.S.R. 180(E)
dated February 17, 2016 or such other policy made in this regard and
(a) have a turnover of less than twenty five crore rupees; and
(b) are not promoted or sponsored by or related to an industrial group whose group turnover exceeds
three hundred crore rupees;
(ii) Investment by an angel fund in any venture capital undertaking shall not be less than
[twenty five] lakh rupees and shall not exceed [ten crores] rupees.
(iii) Investment by an angel fund in the venture capital undertaking shall be locked-in for a
period of [one year].
(iv) Angel funds shall not invest in associates.
(v) Angel funds shall not invest more than twenty-five per cent of the total Investments
under all its schemes in one VCU.

OBLIGATIONS OF SPONSORS AND MANAGERS OF ANGEL FUND. [R.19G]

(i) The sponsor shall ensure that the angel investors satisfy the compliance of general and
specific conditions applicable on AIF-Category I.
(ii) The manager or sponsor shall have a continuing interest in the angel fund of not less than
2.5% of the corpus or [50lakh] rupees, whichever is lesser, and such interest shall not be
through the waiver of management fees.
(iii) obtain an undertaking from every angel investor proposing to make investment in a
venture capital undertaking, confirming his approval for such an investment, prior to making
such an investment

PROHIBITION OF LISTING. [R.19H]

(i) Units of angel funds shall not be listed on any recognized stock exchange.]
ALTERNATE INVESTMENT FUND: REGISTRATION AND OTHER REQUIREMENT

AIF REGULATIONS – KEY CONDITIONS APPLICABLE TO ALL AIFS…

…AIF REGULATIONS – KEY CONDITIONS APPLICABLE TO ALL AIFS

ALTERNATE INVESTMENT FUND: TAX IMPLICATIONS

INTRODUCTION

(i) The tax system is largely based on residence and source rules.
(ii) based on the place of incorporation or establishment of the pooling vehicle and its place of
effective management, investments funds may be classified as onshore or offshore funds.
(iii) Pooling vehicles that are established in India could be set up as a domestic venture capital
fund (DVCF), AIFs.

TAXATION OF INCOME OF DOMESTIC INVESTMENT FUNDS

• The taxation of an investment fund in India can be categorized under two heads:

(i) tax on income received by an investment fund and

(ii) tax on income distributed by an investment fund.

• Provisions for taxation of income received and income distributed by an investment fund
vary, depending on the type of domestic fund (whether mutual fund, DVCF, AIF, REIT or
InvIT) and the form in which they are established (whether company, LLP or trust) and thus
entitlement to a pass-through status.

TAXATION OF INCOME OF DOMESTIC INVESTMENT FUNDS

Investment routes for foreign funds:

Private equity, VCFs, AIFs typically adopt one of the following modes when investing into India:

(i) direct investment in the Indian portfolio company or

(ii) investment in an Indian investment fund vehicle.

APPLICABLE PROVISIONS

• section 10 (23FB), 10(23FBA) Exemption for income of Category I and II AIFs (other than
business income) and 10(23FBB) Exemption for business income in the hands
of unit holders of the Income Tax Act,
• section 115U provides for tax on income received from VCFs;
• section 115UB provides for tax on income of AIFs and income received from AIFs and
• section 115UA provides for tax on income of unit holders and business trusts
• section 194LBB TDS Provision
• Foreign Tax Credit Rules, [Rule 128 of the Income Tax Rules, 1962.]
FOR Passive investment:
• section 115A and 115AB of the Income Tax Act

PASS THROUGH STATUS

• Section 10(23FB) of the Income Tax Act exempts any income of a venture capital company
(VCC) or VCF from investment in a venture capital undertaking (VCU).
• section 10(23FBA) of the Act, any income earned by Category I and Category II AIFs, other
than the income chargeable under the head ‘Profits and Gains of Business or Profession’,
is exempt from tax in the hand of fund.
• section 10(23FBB) of the Act, proportion of income paid or credited to the unit holders,
which is in the nature of business income, shall be exempt from tax, as the same is taxable in
the hands of the Category I and II AIFs.

TAX TREATMENT OF VCF

Type of fund Relevant section of Nature of Tax implications under the Income
income Tax Act
the Income Tax Act

VCC/VCF registered 10(23FB) and 115U All income Any income (irrespective of nature, i.e.
prior to 21 interest, dividends and capital gains)
from investment in VCU is exempt
May 2012 under VCF
under section 10(23FB) in the hands
Regulations
of VCC/VCF (pass-through status).
Income received by unit holders from
investment in VCC/VCF is taxed under
section 115U as if unit holder has made
direct investment in VCU.

TAX TREATMENT OF VCF/AIFS REGISTERED ON OR AFTER 21 MAY 2012 UNDER AIF REGULATIONS – UNTIL
THE FINANCIAL YEAR 2014/15

VCFs registered as a 10(23FB) and 115U All income Any income (irrespective of nature, i.e.
interest, dividends and capital gains)
subcategory of
from investment in VCU is exempt
Category I AIF
under section 10(23FB) in the hands
of VCC/VCF (pass-through status).
Income received by unit holders from
investment in VCC/VCF is taxed under
section 115U as if unit holder has made
direct investment in VCU.
TAX TREATMENT OF AIFS REGISTERED ON OR AFTER 21 MAY 2012 UNDER AIF REGULATIONS – FROM THE
FINANCIAL YEAR 2015/16 ONWARDS

Type of fund Relevant section of Nature of Tax implications under the Income
income Tax Act
the Income Tax Act

Category I and II 115UB and Income from Taxable in the hands of AIFs under
AIFs 10(23FBB) business
section 115UB(4) at the rate of 30%.
and profession
Exempt under section 10(23FBB) in
the hands of the unit holders.

115UB and Other income Exempt under section 10(23FBA) in


10(23FBA) the hands of AIFs (partial pass-
through status, i.e. subject to tax in
the hands of unit holders).
Taxable under section 115UB in the
hands of unit holders.
TDS u/s -194LBB @10% for
resident unit holders and the
applicable rates in force for non-
resident unit holders.

TAXATION OF CATEGORY I AND II AIFS,


VCFS AND THEIR UNIT HOLDERS

• As per section 10(23FBA) of the Act, any income earned by Category I and Category II
AIFs, other than the income chargeable under the head ‘Profits and Gains of Business or
Profession’, is exempt from tax.
• as per section 10(23FBB) of the Act, proportion of income paid or credited to the unit
holders, which is in the nature of business income, shall be exempt from tax, as the same is
taxable in the hands of the Category I and II AIFs.
• In the case of VCFs, as per section 10(23FB) of the Act, any income from investments made
in VCUs is exempt in the hands of VCF, and therefore chargeable to tax in the hands of the
unit holders.
‘PASS-THROUGH’ STATUS TO AIFS AND TAXATION OF UNIT HOLDERS

• As per section 115UB(1) of the Act, income earned by AIF is chargeable to tax in the hands
of the unit holders as if it were the income of the unit holders had the investments been made
directly by them. However, business income would be taxable in the hands of the AIFs.
‘CHARACTERIZATION OF INCOME

As per section 115UB(2) of the Act, income paid or credited by the AIF to the unit holders shall be
deemed to be of the same nature
and in the same proportion in the hands of the unit holders as if it had been received by, or
accrued or arisen to the AIF.
while characterization of income would take place at the AIF level,
taxation would be at the unit holder’s level [subject to provisions of section 10(23FBB)]

‘LOSSES’ NOT TO BE PASSED ON TO UNIT HOLDERS

• As per section 115UB(2) of the Act, where for any assessment year, the net result of
computation of total income of AIF [without giving effect to section 10(23FBA) of the Act]
is a loss, under any head of income, and such loss cannot be set-off against any other head of
income, then such loss shall not be passed on to the unit holders, but carried forward and
set-off by the AIF in accordance with the set-off and carry forward provisions contained in
the Act.

TAX RATES APPLICABLE TO AIFS

As per section 115UB(4) of the Act, total income of the AIF shall be charged to tax at the rate or rates
specified in the Finance Act of the relevant year (where the AIF is set up as a company or as an LLP)
and at Maximum Marginal Rate (‘MMR’) i.e. 30%, where AIF is set up as a trust.

‘NO TAX ON DISTRIBUTION

• As per section 115UB(5) of the Act, dividend distribution tax (DDT) [Chapter XII-D] and tax
on distributed income [Chapter XII-E] shall not be levied on the income distributed by the
Category I and II AIFs to their unit holders.

TAXABILITY OF UNDISTRIBUTED INCOME ON ACCRUAL BASIS

• Section 115UB(6) of the Act provides that where any income of an AIF is not paid or
credited to the unit holders during a particular financial year, then such undistributed income
shall be deemed to have been credited to the unit holders on the last day of that year.

TDS ON PAYMENTS TO AIF


the Central Government has issued a Notification No. 51/2015 dated 24th June 2015, as per which no
tax shall be deducted on payment of the nature specified under section 10(23FBA) of the Act, i.e.
payments to Category I and II AIFs, except for in the nature of business income.

TDS ON DISTRIBUTION TO UNIT HOLDERS BY CATEGORY I AND II AIFS


• As per section 194LBB of the Act, Category I and II AIFs are required to deduct tax on all
income (other than business income) that is paid or credited to their unit holders as follows:
(a) Resident unit holders – at 10 per cent;
(b) Non-resident unit holders – at rates in force.

FILING OF RETURN OF INCOME

• Category I and II AIFs and VCFs are required to file return of income under section 139(4F)
in Form ITR-7.
• The due date for filing the return of income is 31st July of the Assessment Year.
• In the case of a company or any other person to whom tax audit provisions [section 44AB of
the Act] are applicable, the due date would be 30th September of the Assessment Year.
• VCFs are required to file return of income under section 139(4C)(ec) of the Act ) in Form
ITR-7.
• The due date for filing the return of income is 31st July of the Assessment Year.