Foreign investors of AIF notified with new rules by CBDT

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The Long-standing demand of foreign investors of Alternative Investment Funds is taken into consideration for pooling money at The International Financial Services Centre. The Central Board of Direct Tax notified a set of rules on Tuesday (August 12, 2020) stating that these investors need not furnish PAN to operate. This exemption will only get applied if the TDS has been deducted from the investor’s income by the fund.

Alternative Investment Fund (AIF) denotes any fund established or recognized in India which is a privately pooled investment vehicle that assembles funds from sophisticated investors, whether Indian or overseas. An exemption has been granted by the government for Non-Residents investing in the category I and category II of AIF located in IFSC from providing the Permanent Account Number subject to a condition that it only applies if the fund deducts tax from their income and details regarding investor’s name, address, country of residence and TIN ( Tax Identification Number) are provided with the fund.

It was a long-time demand to ease the tax compliance requirements who want to pool money at IFSC, instead of other offshore jurisdictions, like Mauritius and Singapore who do not need to obtain PAN and is also a welcome move as there won’t be any tax revenue leak because it is withheld at AIF level. Category I funds are invested in start-ups, SMEs and the venture capital whereas category II funds include private equity funds, real estate funds along with others. 

The CBDT added a new rule 114AAB notifying this classes of people to whom provisions of section 139A won’t be applicable as it is to obtain PAN. This new amendment can ease the operations of fund managers, attract foreign investors to set up a fund in IFSC and will give a stimulus to IFSC.

In 2017, Stock market regulator SEBI permitted the AIF funds located in IFSC to invest in securities listed in such centres and also allowed them to invest in securities issued by companies incorporated in IFSC. Presently a very huge number of overseas investors don’t invest directly in AIF’s but do that through offshore feeder funds. This provision shall not apply if the non-resident does not earn any income in India other than the income from investment made in category I and category II of AIF located in IFSC.

 The provisions will also not apply to a foreign entity furnishing details in the country or stated region of his residence based on which the non-resident is identified by the government of that country.

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