Foreign investors overseas profit through AIFs won’t be taxed in India

In a clarification regarding taxability of income earned by foreign investors, Central Board of Direct Taxes (CBDT), under Finance Ministry has said that income earned by non-resident investors from investments made overseas but routed through Alternative Investment Funds (AIFs) will not be taxed in India.

“It is hereby clarified that any income in the hands of the non-resident investor from off-shore investments routed through the Category I or Category II AIF, being a deemed direct investment outside India by the non-resident investor. is not taxable in India under section 5(2) of the Act,” said the CBDT circular issued on Wednesday.

As per SEBI, private equity, venture capital and angel are mainly classified as AIFs.

The circular further added that loss arising from the off-shore investment relating to the non-resident investor, being an exempt 1055, shall not be allowed to be set-off or carried-forward and set off against the income of the Category I or Category II AIF.

For the startup community, the development is marked as a significant one.

Many startups and observers tracking the startups’ ecosystem hail the clarification by the CBDT as encouraging move.

CBDT’s move will boost India-based funds and non-resident investors to explore offshore markets. It will push Indian VC and PE funds to support Indian startups, who have set off-shore base due to excessive tax and regulatory scrutiny. It will resolve double taxation issue on profits earned by Indian investors from off-shore investment.

As per an estimate, close to over 15-20% of the total investment coming into Indian startups are via AIFs. After the clarification, the number might go up.

Earlier, startups and investors have sought clarity regarding taxability of income from investments made by the non-resident investor through these AIFs, outside India.

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