INSUBCONTINENT EXCLUSIVE:
grew 7.7 per cent in the second half of 2019, as products were impacted by increasing tax burdens.
An additional surcharge introduced by the
government for wealthy investors and companies has increased the capital gains tax payable by investors of alternative investment funds
(AIFs) to 43 per cent for the fiscal year started in April 2019
If the same investors use other routes such as portfolio management scheme (PMS) or mutual funds, the tax outgo could reduce to as low as 30
per cent.
Hedge funds in India are registered as Category-III AIFs and invest in securities traded on stock exchanges, including equity
shares and derivatives.
Category-III AIF investments totalled Rs 35,777 crore as on December 31 against Rs 33,208 crore at the end of June
2019 and Rs 27,661 crore in December 2018, data from the Securities and Exchange Board of India showed.
The blow came at a time when the
Indian hedge fund industry was growing at a robust pace
Total investments of Category-III AIFs grew 20 times during the four-year period between June 2015 and June 2019
Category-I funds invest in social and infrastructure projects while Category-II are private equity investors who put money in the unlisted
space.
The growth in Category-III AIFs even underperformed the overall industry growth in the six months through December
pass-through status allows a fund to pass on the tax obligations to the investors
Hence, they can pay the investors in full leaving the investors to pay tax on the gains based on their personal income brackets
So, even if an investor has less than Rs 1 crore income in a year, he would end up paying tax at a rate that is applicable to people earning
Rs 5 crore and above.
Even the latest budget announcement to tax dividends in the hands of investors has come as a bane for the hedge funds
since a tax surcharge will apply on dividends, too.
AIFs are products designed for ultra-rich investors
These come with a minimum ticket size of Rs 1 crore
However, unlike mutual funds that are subject to serious investment restrictions, AIFs enjoy a liberal regime.