Indian private equity funds may again receive “pass-through” tax status after an Indian tax court ruled in the industry’s favor. With pass-through treatment, income generated by the fund is taxed at the investor level, not the fund level, to avoid double taxation.
In the case of DCIT v. India Advantage Fund – VII1, an Income Tax Appellate Tribunal held that fund income where the contributions made by the investors are “revocable” in nature, shall be taxable at the hands of the investors.
To be revocable the fund agreement must contain a written declaration appointing the fund manager as a trustee to manage and administer the property of the fund, i.e. its assets. The declaration must also contain a provision that allows the fund manager to alter or cancel fund distributions on a discretionary basis.
Under India’s Alternative Investment Funds (AIF) Regulation, which was launched in June, only funds that invest in start-up or early stage ventures, social ventures or infrastructure were able to benefit from the pass-through tax status.
Accordingly the ruling comes as a big positive for the Indian fund industry as funds that are not entitled to pass-through status from a tax perspective could now seek to achieve a pass-through status by ensuring that the capital contributions made by the investors is on a “revocable” basis, according to a client alert from law firm Nishith Desai .