With a fresh investment framework, the government is reportedly looking at reducing the tax burden on foreign investors that put money in alternative investment funds (AIFs) including venture capital (VC) and private equity (PE) funds in India.

This move comes after a panel headed by M Damodaran, former chairman of the Securities and Exchange Board of India (SEBI), submitted a report in December.

Granting ‘zero-rated or export status’ to India-based AIFs having foreign investors, bringing uniformity in taxing ‘carried interest’, easing norms for employee stock option plans (EsOPs), and aligning capital gains taxes for listed and unlisted securities, are some of the key proposals to be included in the framework, Business Standard reported.

“A framework for PE/VC investment is in the works and it could address taxation and regulation faced by this class of investors. It is expected to be introduced in the monsoon session of Parliament,” a senior government official said as quoted in the report.

Currently, inter-ministerial consultation is being conducted and the possibility of implementing some proposals of the panel’s report is also being discussed.

The panel also suggested taking a uniform view on carried interest and to treat it as ‘return on investment’.

Carried interest’ or ‘carry’ refers to such part of a fund’s profit that is allocated to its fund manager as is proportionate to the performance and success of the fund. According to a source quoted in the report, the PE/VC industry is concerned that if carried interest is not treated as return on investment, it may lead to 18% GST.

Last year, the Finance Ministry had set up a committee to examine and suggest measures to address regulatory and other issues enabling the scaling up of investments by VC and PE investment firms.

The ministry said the committee will comprehensively study, using a systems approach, the end-to-end frictions and potential accelerants from regulatory policy and taxation to facilitate ease of investing and to encourage ‘investments in India’.

Several reforms have been going on in the AIF segment for some time now. For example, SEBI was reportedly planning to increase the minimum ticket size of Alternate Investment Funds (AIFs) to INR 5 Cr against the existing threshold of INR 1 Cr.

PE and VC firms also have reportedly asked SEBI to relax co-investment norms within the alternative investment fund (AIF) route.

According to SEBI, AIF fund managers raised INR 6.41 Lakh Cr across categories till the end of June 2022.