GIFT CITY – An overview
Alternative Investment Funds (AIF), as a pooling vehicle, have great potential in India. With a view to facilitate and regulate the securities market in International Financial Services Centre (IFSC) at Gujarat International Finance Tec-City (GIFT City), the Securities and Exchange Board of India (SEBI) issued the SEBI (IFSC) Guidelines in 2015 (Guidelines), including the fund framework in IFSC. Further in 2018, operating guidelines for AIFs in IFSC (Operating Guidelines) were issued by SEBI, which provided for a framework for setting up AIFs in IFSC.
What is an AIF?
An AIF is an investment vehicle which privately pools funds / monies from domestic as well foreign investors and invests such funds / monies in securities as per a defined investment policy. In India, an AIF is regulated under the SEBI (AIF) Regulations, 2012 (SEBI AIF Regulations). One can set up an AIF, in IFSC, in the form of a trust, company, LLP or body corporate in the IFSC.
Permissible investors in an AIF in IFSC are:
- a person resident outside India;
- a non-resident Indian;
- institutional investor resident in India eligible under exchange regulations to invest funds offshore - to the extent of outward investment permitted; and/or
- person resident in India (having minimum net worth of USD 1 million during preceding financial year) eligible under FEMA to invest funds offshore - to the extent allowed in Liberalized Remittance Scheme (LRS).
The minimum investment required by an investor in an AIF is as under:
(a) For employees or directors of the AIF or its manager - USD 40,000
(b) For other investors - USD 150,000
Categories of AIFs permitted in IFSC
- Category I AIF: Funds which invest in start-ups, early-stage ventures, social ventures, small and medium enterprises, infrastructure sector or areas which the Government of India considers as desirable.
- Category II AIF: Residual category i.e., other than Category I and III AIF and do not undertake leverage other than to meet day-to-day operational requirements as per SEBI AIF Regulations.
- Category III AIF: Funds which employ diverse or complex trading strategies and leverage including through investment in listed or unlisted securities / derivatives.
Setting up an AIF
An AIF is set up by a sponsor as per the SEBI AIF Regulations and Operating Guidelines. To set up an AIF in IFSC, approvals required to be obtained from SEZ authorities and from the SEBI / IFSC Authority. Further, obligations and compliances to be undertaken by the sponsor and/or the manager of an AIF have been laid down in detail under the SEBI AIF Regulations and Operating Guidelines.
Benefits of AIFs in IFSC
- Various tax incentives and regulatory exemptions are available
- Lower operating costs, in addition to other subsidies granted by the State Government of Gujarat
- Availability of skilled resources
- Proximity to the onshore market
- World class infrastructure, unparalleled connectivity and transportation access
- Access to multiple markets from IFSC
Tax framework for AIFs in IFSC
Category I & II AIF:
- For Indian income tax purposes, Category I and II AIFs are considered to be tax pass through entity, except for business income which is taxed at the AIF level.
- Income accruing or arising or received by non-resident investors from offshore investments through a Category I and II AIF is not taxable in India.
- Exemption has been provided to non-resident investors from obtaining a PAN card and filing return of income in India, provided they earn income only from investments made in a Category I or Category II AIFs in IFSC and tax has been deducted on the distribution made by such AIFs to non-resident investors. The AIF is required to electronically file, on a quarterly basis, details collected from its non-resident investors to the relevant tax authorities in the prescribed form.
Category III AIF:
- Category III AIFs are subject to fund level taxation.
- The following income earned by the Category III AIF, which is attributable to non-resident investors in the AIF, is exempt from tax:
- Income on transfer of any securities (other than shares in a company resident in India), including derivatives, debt securities and offshore securities.
- Income from securities issued by a non-resident (not being a Permanent Establishment) and where such income otherwise does not accrue or arise in India.
- Income from a securitization trust chargeable under the head “profits and gains of business or profession”.
- Income on transfer of specified securities listed on a recognized stock exchange located in IFSC where consideration for such transaction is in convertible foreign exchange.
- Income on transfer of shares in an Indian company is taxable as under to the Category III AIF:
- Short-term Capital Gains (STCG) - 15%, if Securities Transaction Tax paid, else 30%
- Long-term Capital Gains (LTCG) - 10%
- Income in respect of securities (such as interest, dividend) is taxable to the Category III AIF at the rate of 10% (5% in case of interest income on certain rupee denominated bonds, Government securities or municipal debt securities referred to in section 194LD)
- Any income accruing or arising to or received from the Category III AIF or on transfer of its units is exempt from tax in the hands of investors.
- Surcharge on certain LTCG, STCG and dividends earned by the Category III AIF is capped at 15%. Further, the provisions of Alternate Minimum Tax are not applicable to the Category III AIF.
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