In Budget 2019, the government has thrust its focus on growth with sector specific policies to achieve the opportunistic target of being a US$ 5 trillion economy in the shortest possible time. Private equity investors play a key role in growing an economy by improvising on technologies like digitisation, artificial intelligence, robotics, unique managerial skills and growth funding.
Tax cost is one of the key drivers in any private equity deal and there are uncertainties which become negotiation points during a deal. This Budget has offered a few reliefs and streamlined industry issues which plagued investments by private equity funds.
In the Budget speech, it has been mentioned, that to attract foreign investments, the government proposes to increase the existing investment limit by foreign portfolio investors (FPI) from 24 per cent to sectoral limit under foreign direct investment (FDI) route. This will attract institutional investors bringing in foreign funds leading to investment led growth. Also, FPIs will be permitted to invest in listed debt securities issued by Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (InvITs). It is proposed to rationalise and streamline the existing KYC norms for FPIs to make it more investor friendly.
- Category II AIFs can now subscribe to shares of an Indian company at a premium over fair value, which was earlier restricted only to VCF set up under Category I AIF. This amendment attempts to address the issue of ‘Angel Tax’ by allowing start-ups and other companies to issue shares at premium without inviting litigation and questionings on valuations from tax authorities. However, other sub categories under Category I such as infrastructure, SME, social funds are still left out of the ambit.
- Another relief at investor level is the availability of losses from their investment in AIF. Investors will be eligible to carry forward and set off losses other than business losses if they hold the units for a period of 12 months. However, the condition of 12 months could create doubts for investors who may invest in an AIF in subsequent closings.
For e.g. an investor acquires units of AIF in July 2019. Losses other than losses from business are given below:
As on March, 2020 the investor does not hold units for at least 12 months. There is an ambiguity on carry forward of losses i.e. INR 10 crore in the above example.
The Budget has also addressed long-standing issue on tax treatment of interest received on non-performing assets by NBFCs. With a view to provide level playing field to certain categories of NBFCs, it is proposed that interest on certain bad or doubtful debts shall be taxable in the year of receipt. This is a big impetus to the NBFC industry which is currently facing liquidity crisis. Corresponding deduction to the borrower is also available on payment basis. Conversion of unpaid interest into a loan shall not be eligible for a deduction.
Buy back tax will be applicable to listed shares and hence any listed shares bought back by listed entities shall be subject to 20 percent tax in addition to applicable surcharge and cess.
Government has placed emphasis to promote IFSC as an attractive investment jurisdiction for foreign investors.
Tax benefits have been granted to units set up in IFSC like extending tax holiday of 100 percent to 10 years out of 15 years, tax sops to mutual funds set up in IFSC, exemption on transfer of specified securities by Category III AIF, exemption from dividend distribution for dividends declared from accumulated profits.
Overall, the Budget seeks to encourage investments by funds by liberalising the policies, transparency in tax administration, reduce tax burden for small and medium enterprises and encourage investments in financial sector in order to drive growth in the economy.
The author is the Partner, Deloitte India.