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Finance minister sweetens the deal for startup investors with AIF changes

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The finance minister during his budget speech proposed changes to taxation in alternative investment funds (AIF) and also allowing foreign investments in them aimed at providing more private equity for new ventures and startups. Arun Jaitle, during the speech, proposed a tax “pass through” for both category-I and category-II AIFs, where tax is levied on the investors in these funds and not on the funds.

“This will step up the ability of these Funds to mobilise higher resources and make higher investments in small and medium enterprises, infrastructure and social projects and provide the much required private equity to new ventures and start-ups,” the finance minister added. Jaitely also said that these funds will now be allowed to take in foreign investments.

“To further simplify the procedures for Indian Companies to attract foreign investments, I propose to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps,” Jaitely added in his speech.

“Earlier, there was always foreign investment in AIFs but they had to go through the FIPB approval route. With the new proposal this will be a procedural simplification,” said Zulfiqar Shivji, head of transaction advisory services at BDO India. “With regards to the tax pass through to individual investos, it could mean that they can apply for a refund application on the taxes paid,” he added.

AIFs are basically funds established or incorporated in India for the purpose of pooling in capital from Indian and foreign investors for investing as per a pre-decided policy.

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