ARCs seek pass-through for alternative investment funds' security receipts income

Asset reconstruction companies (ARCs) are on the frontlines, lobbying for a pass-through tax designation for alternative investment funds (AIFs) that invest in security receipts (SRs). They believe the current tax bracket of 42.74% is stifling potential investors, proposing instead that SR income be taxed directly in the hands of the end investors.

Mumbai: Asset reconstruction companies (ARCs) have urged the government to extend pass-through tax status to alternative investment funds (AIFs) investing in security receipts (SRs), seeking relief from the steep 42.74% maximum marginal tax currently levied on such income.

In a November 26 budget representation to finance minister Nirmala Sitharaman, ARCs argued that profits from SR investments should be taxed directly in the hands of end investors-at their respective tax rates-rather than at the fund level.

"The possibility of a 42.74% tax at the AIF level is a deterrent for this investment to flow into ARC trusts," according to the letter, a copy of which was seen by ET. "Large pools of capital are required for large resolutions by ARCs. Hence, a pass-through regime for AIF income from investment in SRs issued by an ARC trust is critical to the success of a competitive market for these NPAs."

Budget request Say taxing profit at the fund level is hurting money flow into their trusts

ARCs have requested that, similar to investment income, the entire income earned by an AIF from SRs issued by ARC trusts be treated as pass-through and taxed in the hands of AIF investors.

Given the ambiguity surrounding tax treatment for foreign investors in ARC-issued SRs, ARCs have also sought clearer guidelines on the applicable tax rate for FPIs investing in such instruments.

A committee set up by the Reserve Bank of India had earlier recommended aligning income from SRs with those from other securities such as government securities and corporate bonds.

ARCs have further urged the government to extend the existing 5% concessional tax rate-currently applicable to FPIs and other non-residents on government securities, corporate bonds, and ECBs-to interest income earned by FPIs from SR investments. They have also sought clarification that any upside categorised as business income be taxed at 20%, consistent with the treatment of securities income under Section 115AD of the Income Tax Act.

"For giving exit to existing seller-investor like banks and improved liquidity in distressed debt paper, flow from AIFs and FPIs, which possess requisite risk capital and appetite, is an essential requirement for development of a vibrant market," said Hari Hara Mishra, CEO, Association of ARCs in India. "A tax-friendly regime will be a great enabler."
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Source: EconomicTimes
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