“The clarification regarding characterisation of gains realised on sale of investments by Category I and Category II AIFs will take away the uncertainty faced by the unit holders. This is especially considering that the difference in tax rate is quite significant. Capital gains is taxed at 12.5 per cent while business income is taxed at 25-35 per cent,” said Amit Singhania, Partner, Areete Law Offices.
According to Amit Maheshwari, Tax Partner, AKM Global, the decision comes in response to long-standing disputes between taxpayers and tax authorities over the classification of income from such transactions.
“While taxpayers have traditionally classified such income as capital gains, tax authorities have consistently argued for its classification as business income. This divergence has led to prolonged litigation, creating uncertainty for investment funds and other stakeholders,” said Maheshwari.
The Budget has also removed the TCS provision which could have been applied to the sale of securities. This will reduce the compliance burden for AIFs.
“This provision was ambiguously worded to bring AIFs under its ambit and led to friction and uncertainty around exits. Its removal will increase the pace of exits and give tax clarity,” said Siddarth Pai, founding partner of 3one4 Capital.
He added that the AIF Industry welcomed the move to increase funding to start-ups through another fund of funds with a contribution of ₹10,000 crore. “The Deep Tech fund of funds will provide the capital needed for deeptech companies to scale in India. If this is structured to provide long-term capital support, this will be a huge boost to R&D in India, development of fundamental research and eventual commercialisation,” Pai said.
