Answer ... Section 194 LBB of the Income Tax Act states that where income is received from units of a specific investment fund, the person responsible for making the payment must deduct income tax when crediting the income to the relevant account or when making the payment, whichever happens first. For residents, the deduction is at a rate of 10%. For non-residents (individuals or foreign companies), the deduction is based on the applicable tax rates. However, where the recipient is a non-resident and the income is not taxable under Indian tax laws, no deduction will be made.

Pursuant to Section 10 read with Section 115UB of the Income Tax Act, a pass-through status is granted for tax purposes for Category I and II alternative investment funds (AIFs) on any income other than business income. This means that income earned (excluding business profits or gains) is not taxed at the AIF level. Instead, it is directly taxed at the hands of investors, as if the income were received directly from the investments. This tax treatment applies uniformly, irrespective of the AIF’s legal structure (eg, private trusts, companies, limited liability partnerships (LLPs)).

Unabsorbed losses (excluding business losses) of the AIF can be allocated to investors, allowing them to offset these losses against their individual incomes, provided that they have held AIF units for at least 12 months. Distributions from Category I and II AIFs are subject to a withholding tax of 10% for resident investors and applicable rates for non-residents, considering any tax treaty benefits.

However, business income of Category I and II AIFs is taxed at the maximum marginal rate (MMR) of 30%, plus surcharge and education cess, at the AIF level. Once this tax is paid, investors are relieved of further tax liability on the same income.

On the other hand, Category III AIFs do not benefit from statutory pass-through status. Typically structured as determinate trusts, they may have identifiable beneficiaries with determined beneficial interests. The trustee, in a representative capacity, may fulfil the tax obligation on behalf of investors under Sections 160 to 162 of the Income Tax Act and must pay off the tax liabilities of the beneficiaries. Nevertheless, trusts with business income are subject to tax at the MMR. The income tax authorities can recover tax from either the trustee or the investors directly. Trustees, as representative assesses, retain the right to recover taxes paid on behalf of investors.

Answer ... An AIF fund manager is typically established as a company or an LLP, subjecting management fees to income tax and goods and services tax (GST) based on its legal status. Additionally, any profits allocated to the fund manager from the AIF’s investments are taxed according to the nature of the payment.

An LLP is subject to a fixed tax rate of 30% on its total income. When the total income surpasses INR 10 million, an additional surcharge of 12% is levied on the income tax amount. Conversely, a private limited company incurs a tax of 25% when its annual revenue is below INR 4 billion. However, if the company’s annual revenue exceeds INR 4 billion, the tax rate increases to 30%. Private limited companies also have the option to choose between the standard rates of 22% (for existing companies) and 15% (for new companies).

Notably, the 1 July 2021 ruling of the Custom, Excise and Service Tax Appellate Tribunal in ICICI Econet Internet and Technology Fund (Service Tax Appeal 2900/2012) held that the portion of a fund’s profits distributed to the asset manager as ‘carried interest’ constitutes a performance fee and is thus liable to service tax (now replaced by GST). Previously treated as capital gain income subject to a lower tax rate, this ruling may prompt tax authorities to consider it as a performance fee for taxation, pending resolution by the Supreme Court or a high court.

Moreover, the International Financial Services Centre (IFSC) at Gujarat International Finance Tec City has introduced a favourable tax framework for AIFs established within the IFSC jurisdiction. AIFs in the IFSC can enjoy a tax holiday, exempting 100% of their business income for any 10 years during the first 15 years of operations. Notably, fund managers operating from the IFSC are not subject to GST on their earnings.

Answer ... Please see question 8.1

Answer ... In the ever-expanding global markets, governments and financial institutions are increasingly addressing issues related to tax evasion and money laundering. Initiatives such as the US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) represent concerted efforts to tackle these challenges. FATCA is swiftly emerging as the global standard in the ongoing endeavour to combat offshore tax evasion. The United States has entered into intergovernmental agreements (IGAs) with over 113 jurisdictions and is actively engaged in discussions with numerous other jurisdictions on this matter.

The Income Tax Rules, 1962 were amended by Notification 62/2015, which introduced Rules 114F to 114H and Form 61B, establishing a legal foundation for reporting financial institutions to uphold and report information regarding reportable accounts.

The signing of the IGA between India and the United States on 9 July 2015 marked the implementation of FATCA, requiring Indian financial institutions to disclose US reportable accounts to the Indian income tax authorities for subsequent transmission of financial data to US authorities annually.

Similarly, the CRS – an initiative of the G20 countries and the Organisation for Economic Co-operation and Development for the automatic exchange of financial account information among participating nations – saw India join as a signatory on 3 June 2015. Essential amendments to income tax laws were enacted to facilitate the execution of both the CRS and the IGA.

These initiatives not only have strengthened global measures to fight financial crime but also support a fair and accountable international financial system.

Answer ... Please see question 8.1.