Answer ... Category I and II AIFs: The Indian Income Tax Act, 1961 has accorded tax pass-through status to Category I and II AIFs incorporated in India as a trust, limited liability partnership, body corporate or company. With respect to its income (other than business income), this is taxed directly in the hands of the investors of the AIF, as if the investments had been made directly by such investors. Similarly, losses (other than business losses) are regarded as losses of the investors and may be carried forward and offset in future years. With respect to business income and business losses, there is no pass-through. Hence, business income is taxed at the AIF level at the maximum marginal rate. With regard to business losses, the AIF is allowed to carry forward and offset such losses in future years.
Category III AIFs: While Category I and II AIFs have been conferred with tax pass-through status, Category III AIFs are not afforded such tax relief under the Income Tax Act. Most Category III AIFs are organised as trusts under the Indian Trusts Act, 1882. Under the Income Tax Act, where the beneficiaries are identifiable with their shares being determinate (specific trusts), the trustee of the trust is taxed, as a ‘representative assessee’, such taxes as would be recoverable only from the investors it represents, as if the income arose out of investments made directly by the investors. A determinate trust is where the names of the investors and their respective beneficial interests are known from the trust deed. In AIFs where the beneficiaries are indeterminate (eg, in case of open-ended funds), the income will be subject to tax at the maximum marginal rate.
Answer ... Managers and advisers are not governed by any separate tax regime and are taxed under the same provisions as apply to other resident entities. Generally, Indian fund managers and advisers are incorporated as companies or limited liability partnerships (LLPs).
Companies are taxed at a rate between 22% and 25%, subject to the satisfaction of certain conditions; a dividend distribution tax (DDT) of 15% also applies to dividends distributed to shareholders (both rates exclusive of surcharge and cess). The recipient shareholder is exempt from tax on such dividends received, subject to a certain cap.
An LLP must pay tax at the rate of 30% (plus applicable surcharge and cess), as against the lower corporate tax rate applicable to companies. However, the profits distributed by an LLP to its partners are taxed only in the hands of the LLP, as part of its income, and the partners of the LLP need not pay any additional tax on receipt of such profits. LLPs are also not subject to DDT or equivalent tax on profits upstreamed to their partners.
In certain cases where the tax liability of the company or the LLP is less than a prescribed limit, the company or LLP will be required to pay a minimum alternate tax at a rate of 18.5% (plus applicable surcharge and cess) of the book profit (to be computed in a specified manner).
Answer ... Please see question 8.1.
Answer ... India has incorporated into law, in its entirety, the internationally accepted reporting standard under the Common Reporting Standard (CRS), and has also signed an inter-governmental agreement with the United States for the implementation of Foreign Account Tax Compliance Act (FATCA) rules. To this end, an insertion was made in the Income Tax Rules, 1962, under which Indian tax officials must obtain specific account information from US ‘reportable accounts’, as required under FATCA, as well as from banks and other financial institutions, as required under the CRS. India, being one of the early signatories to the CRS, committed to exchange information automatically by 2017. The government has also ratified the Multilateral Competent Authority Agreement for exchanging ‘country-by-country’ reports on an international platform as per the stipulated timelines.
AIFs, which constitute registered financial institutions, must register with the US Internal Revenue Service and obtain a global intermediary identification number, and also register with the Indian income tax authorities for reporting. Whether an AIF is a reporting financial institution or a non-reporting financial institution, several factors come into play, including the status of investors (eg, resident or non-resident), the status of its manager and so on.
Answer ... With respect to cross-border funds, the typical strategy adopted is to set up the offshore pooling vehicle in a tax favourable jurisdiction which has better tax implications for capital gains (eg, the India-Netherlands tax treaty exempts certain kinds of capital gains from tax) or lower withholding tax (eg, on interest income – for example, the rate is 7.5% under the India-Mauritius tax treaty).