To boost investment, Budget presents GIFT to VC funds on compliance

NEW DELHI: Venture Capital funds located in Gujarat International Finance Tec (GIFT) City will not have to disclose the source of their funds after a budget proposal is implemented, said officials. The relaxation has been listed in the budget under measures to promote investment and employment, they said.

“This is being done to ease compliance burden on the VC funds headquartered in the IFSC (international financial services centre) and bring them on a par with the Sebi (Securities and Exchange Board of India)-registered ones,” said a senior government official, who did not wish to be identified.

The budget said, “It is proposed that where a VC fund located in International Financial Services Centre extends a loan/other amount to an assessee, it shall no longer be called upon to explain the source of funds.”

Officials, however, said that the exemption would not provide any immunity under the Prevention of Money Laundering Act (PMLA) and that action would be initiated in case a violation is detected.

It also proposed that retail schemes and exchange-traded funds in the IFSC would enjoy tax exemptions along similar lines as those available to specified funds. In addition, surcharge would not apply on income tax payable on income from securities by specified funds in the IFSC once the budget proposal gets approved.

“These proposals will exempt a VC fund from scrutiny under section 68 of the Income Tax Act, when regulated by the IFSC Authority,” Gokul Chaudhri, president-tax, Deloitte South Asia, told ET. This is similar to how Sebi-regulated VCs were exempted last year, he said.

According to Chaudhri, section 68 was reworded a few years ago to widen its applicability. “Effectively, a company receiving money from an investor could face scrutiny if the latter did not have documentation to disclose the source of the funds.”

Core Settlement Guarantee Fund
The budget also proposed that certain income of the Core Settlement Guarantee Fund set up in the IFSC be considered exempt. Besides, it said, section 94B would not be applicable to certain finance companies located in the IFSC.

This section addresses concerns over “thin capitalisation”, which leads to reduced taxability on interest income, it said.