AIF Taxation Slides Alternative Investment Fund

aif

1. www.equalifi.org TAXATION OF CATEGORY I AND CATEGORY II AIF Investee Companies Investors( R/NR/NRI) Business income – taxed at AIF level AIF to withhold tax on pass through income Tax exempt Distributions Taxable income Income from investments Temporary investments AIF PASS-THROUGH STATUS AVAILABLE IN RELATION TO CATEGORY I & II AIF. CHARACTERISATION OF INCOME Pass Through status Income other the Business Income to be taxed directly in the hands of investors. Business income to be taxed in the hand of AIF at Maximum Marginal Rate (MMR) Gain of transfer of securities – Business Income v/s Capital Gain In case of unlisted shares - to be categorised a Capital Gain except in following situations genuineness of transactions is questionable. the transfer of unlisted shares results in lifting of corporate veil. the transfer of unlisted shares results in change in the control and management of underlying business. In case of Listed shares and securities - to be categorised a Capital Gain if such shares and securities are held for more than 12 months Interest income – Business Income v/s IOS? Income from temporary investment – Business Income No pass-through status Taxable in the hands of AIF at MMR

2. www.equalifi.org TAXATION OF CATEGORY I AND CATEGORY II AIF Investee Companies Investors( R/NR/NRI) Business income – taxed at AIF level AIF to withhold tax on pass through income Tax exempt Distributions Taxable income Income from investments Temporary investments AIF WITHHOLDING TAX REQUIREMENTS No withholding on payments made by Investee Companies to AIF (CBDT Notification) AIFs to withhold tax on pass through income, at the time of credit to the account or at the time of payment to investors, which ever is earlier In case of residents – 10% In case of non- residents - As per rates in force, subject to treaty benefits DEEMED INCOME Income arising in the hands of AIF during a financial year shall be taxed in the hands of the investors on deemed basis assuming same has been distributed to the investors on 31 March of the subjected financial year TREATMENT OF LOSSES REFER NEXT SLIDE

3. www.equalifi.org CARRY FORWARD OF LOSSES LOSSES AT AIF LEVEL BUSINESS LOSS LOSSES U/H IOS or CAPITAL LOSS INVESTOR HOLDS AIF UNIT FOR MORE THAN 12 MONTHS TO BE IGNORED AND LAPSED TO BE PASS THROUGH TO INVESTORS No Yes ALLOWED TO BE CARRIED FORWARD IN THE HAND OF AIF Fund level expenses in the form of management fees, operating expenses etc.

4. www.equalifi.org SUMMARY: CATEGORY I AND CATEGORY II AIF Entity Tax Framework Investee Company Interest Expense Tax deductible for Investee Company No withholding on interest payment to AIF (u/s 197(1)(F)) Dividend Payment No DDT, Directly taxable in the hands of the investors AIF Interest Income To be categorised as IOS – Pass through - No tax in the hands of AIF WHT @10% in case of Resident and applicable rate in case of NR Capital Gain Pass through - No tax in the hands of AIF WHT @10% in case of Resident and applicable rate in case of NR Dividend Income To be categorised as IOS – Pass through - No tax in the hands of AIF Business Income Taxable in the hand of AIF @ MMR Unitholders Basis of Taxation Taxability based on nature of income received by AIF Interest Income Resident unitholder – Taxable at applicable rates Non-Resident unit holders – Taxable at 20% Dividend Income Taxable Capital Gain Subject to nature and holding period of the securities in investee company Business Income Exempt in the hands of unit holders

5. TAX IMPLICATIONS ON EXIT Asset Class Period of holding to qualify as "Long term capital asset" Indexation for long term capital gains Unlisted Shares (including CCPS) 24 months Available Membership interest in partnership Or LLP 36 months Available Debentures/Bonds / CN 36 months Not available Listed shares 12 months Not available Conversion of CCD/CCPS Period for which CCD/CCPS held by AIF shall be deemed to be the holding period for converted security - Rate of Tax Resident Individual Non Resident Individual Domestic Company Foreign Company Long term capital gains (Unlisted Shares) 23.92% (With Indexation) 11.96% (Without indexation) 23.92% (With Indexation) 11.96% (Without indexation) Long term capital gains (CCD) 23.92% (Without Indexation) 11.96% (Without indexation) 23.92% (With Indexation) 11.96% (Without indexation) Short term capital gains (Unlisted Securities) 39.0% (Without Indexation) 39.0% (Without Indexation) 25.17% (Without Indexation) 43.68% (Without Indexation) *in case the individual is opting for new tax regime

6. www.equalifi.org REPORTING REQUIREMENTS INCOME TAX RETURN INCOME BIFURCATION REPORT (FORM 64C and 64D) To the LP/Investors To Income Tax Authorities ( Principal Commissioner or the Commissioner of Income-tax ) Form 64D by 15th day of June of the financial year following the previous year Form 64C by 30th day of June of the financial year following the previous year Detail of the AIF Break up of total income under different heads Details of previous year losses Details of accumulated losses as on 31 Mar 2019 Net taxable income post adjustment of losses Unitholder wise income and losses bifurcation Detail of unitholder Details of income or loss paid or credited by AIF Details of pass-through losses Investors AIF Mandatory ITR 5 : For persons other than- (i) individual, (ii) HUF, (iii) company and (iv) person filing Form ITR-7 Schedule PTI : Pass Through Income details from business trust or investment fund as per section 115UA, 115UB

7. www.equalifi.org SCHEDULE PTI

8. www.equalifi.org TAXATION OF CATEGORY III AIF NO PASS-THROUGH STATUS IS AVAILABLE IN RELATION TO CATEGORY III AIF. TYPICALLY STRUCTURED AS REVOCABLE TRUST TO ACHIEVE PASS THROUGH STATUS The Fund discharges taxes at the fund level, under the PAN of the Fund, through the trustee, in its capacity as a “representative assessee”. The Fund operates under two investment portfolio model namely Trading/ Stock-in-trade portfolio (comprising securities that are frequently traded and are classified as stock-in-trade); Long term Portfolio (comprising securities intended to be held for 12 months or longer and are classified as capital assets.) The fund income will be classified as business income and capital gains based on investment objective under segregated portfolio holding. Trading Portfolio : Business income will be taxed at the prevailing rate of 30% plus surcharge and cess. Long Term Portfolio : Capital gains will be classified as long term or short term and taxed at respective rates. The tax will be charged to investors at the end of financial year or at redemption, whichever is earlier by way of reduction in units. The estimated tax amount payable by investor divided by NAV of that class will determine the number of units to be reduced.

9. www.equalifi.org CATEGORY III AIF – UNSETTLED / UNRESOLVED PREPOSITIONS LLP AS AN ALTERNATIVE STRUCTURE FOR CATEGORY III AIF?

10. www.equalifi.org TAXATION OF CATCH UP AND CARRIED INTEREST Diversion of income by overriding title Diversion of income refers to an obligation to apply income of an assessee, in a predetermined manner BEFORE it is received by the assessee or BEFORE it has arisen or accrued to the assessee Diversion has to be at the source of income i.e. prior to the assesse receiving / accruing the income there exists an obligation on behalf of such assessee to pay part of income to someone else (for e.g. payment of part of income towards alimony, payment of part of purchase consideration to wife of deceased partner of a partnership firm) Diversion could be by way of a court order or by contractual obligation but the diversion has to be of income at source and not at receipt There is an overriding charge on income i.e. assessee does not have title / charge on such part of income. Application of income Unlike diversion of income, application of income is a case where there is an obligation to apply / part away with income of assessee to discharge an obligation of the assesse AFTER the income is received / accrued / arisen to the assesee Application of income is triggered where the income accrue or arises or is received by an assesse and then applied / paid / diverted It is essentially apportionment of income towards a party for discharging obligation vis-à-vis creating an obligation towards such party at source for payment of income to such party (for e.g. repayment of loan, payment to creditors, etc) Taxability arising to investors as well to investment advisor, it is important to first understand tax concepts of “Diversion of income by overriding title” and “Application of income” Based on jurisprudence, it is inferred that income which is diverted by overriding title is taxable in the hands of recipient and not taxable in the hands of the person whose income is diverted