PEs plan to set up funds in tax havens
With the pass-through status of domestic funds being reduced to a few sectors, domestic private equity funds such as IDFC and IL&FS are considering the option of setting up future funds in tax havens like Mauritius to come around the new regulation.
By Team ET, TNN |
With the pass-through status of domestic funds being reduced to a few sectors, domestic private equity funds such as IDFC and IL&FS are considering the option of setting up future funds in tax havens like Mauritius to come around the new regulation. “The regulation will lead to offshore entities being set up by domestic funds. The incentive to have a domestic fund registered with Sebi is lost,” said Luis Miranda, President & CEO, IDFC Private Equity. Adds
Shahzaad Dalaal, MD, IIML: “There will be limited option besides setting up offshore entities.’’ Setting up offshore entities by domestic funds, however, will require RBI approval and it remains to be seen whether such approvals will be granted. IDFC has an infrastructure fund, which is not one of the priority areas identified by the budget, which will be exempt from income tax.
The exemption from income tax for funds registered in India has been restricted to seven sectors including biotechnology, nanotechnology, IT hardware /software, R&D for new chemical entities, seed research, and dairy and poultry sectors. If domestic venture capital funds invest in any other sector and make money, they will have to pay taxes now. Foreign funds, which are registered in Mauritius or other countries that have friendly tax treaties with India will remain unaffected from this restriction.
Experts say, the new regulation may also lead to a proliferation of IPOs, since exits through the IPO route do not attract any capital gains tax. “The new taxation rules incentivise IPOs as an exit route and may also lead to sub-standard issues,” said Mr Dalal. There is ambiguity on whether the withdrawal of the pass through status would lead to double taxation at the hands of the funds as well as investors. “Technically, income could be taxed at both, the venture capital fund level, and at the level of investors,” said Mukesh Bhutani, partner, BMR & Associates.
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