In a bid to attract capital into the distressed assets space, asset reconstruction companies (ARCs) have sought a “pass-through” status for income earned by Alternative Investment Funds (AIFs) from their investments in such assets.
If accorded a “pass-through” status, AIFs will not have to pay tax at the entity level. However, their investors will pay tax.
An AIF is a privately pooled investment vehicle (a fund established or incorporated in India), which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors, according to the Securities and Exchange Board of India (SEBI).
The Association of ARCs in India, in a representation to the Finance Ministry, noted that an AIF pools resources from various investors and any income earned from its investment in security receipts (SRs) should logically be treated as income at the hand of investors. At present, such income is taxed as business income of AIFs, attracting a maximum tax level of 42.74 per cent.
According “pass-through” status for AIFs will help its investors earn better return on their investment, aligning risk with reward for putting money in riskier distressed assets. So, more money will flow into distressed debt ensuring liquidity and better chances of revival of sick units.
“The RBI’s Committee on ARC Sector in 2021 had recommended a pass-through regime for AIFs’ income from investment in SRs. This measure will boost investor sentiment and attract funding into the distressed debt market through Security Receipts issued by ARCs and provide depth and liquidity,” said Hari Hara Mishra, CEO, Association of ARCs in India.
ROLE OF ARCs
ARCs acquire stressed assets, including bad loans, loans showing signs of incipient stress, and written-off accounts, from banks and financial institutions and implement resolution strategies for maximising recovery and optimizing the value of such assets.
An SR is a receipt issued by an ARC to any qualified buyer evidencing purchase or acquisition of an undivided right, title or interest in the financial asset involved in securitisation.
ARCs have also sought clarity on the tax rate applicable to foreign portfolio investors (FPIs) when they invest in SRs issued by ARCs. They noted that under the income tax law, no specific tax rate is mentioned for taxability of FPIs’ interest income or upside received by them from their investment in SRs.
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