AIF Investors In GIFT City To Enjoy Tax Exemption

The Central Board of Direct Taxes has clarified that a non-resident investor's income from offshore investments that go through an Alternate Investment Fund set up in an International Financial Services Centre will not be taxed.  

At present, GIFT City is the maiden IFSC in India.

AIF is a privately pooled vehicle that puts in funds for the purpose of investments for the benefit of its investors.

In 2019, the tax department had notified that a non-resident investor's income, arising out of investments made outside India, through a domestic AIF will not be taxed. The board reasoned that such an investment will not be taxed in India because it would be deemed as a direct investment outside of India. This was made applicable to certain categories of SEBI-registered AIFs.

Via Finance Act 2023, the definition of an investment fund was expanded to include AIFs set up, as per the International Financial Services Centres Authority (Fund Management) Regulations 2022, under the IFSCA Act.

Consequently, the provision which talks about tax on investment funds and their unit holders now applies to AIFs regulated under the SEBI (AIF) regulations or the IFSCA (Fund Management) regulations.

Income from overseas investments made through an AIF in GIFT City will also be tax-free for non-resident investors, the CBDT said in a circular earlier this week.

This clarification is a step in the right direction, as this brings tax benefits on par for non-resident investors investing in AIFs set up in GIFT City or outside GIFT City, according to Abhay Sharma, partner at Shardul Amarchand Mangaldas.

It also eliminates the scope for a dispute with the tax authorities, with respect to taxation of offshore investments made by an AIF setup in GIFT City, he said.