look to make returns irrespective of market direction. They make use of derivatives and sophisticated strategies, which allow them to benefit from falling stock prices as well as position themselves to profit when markets
rise. Such funds come under category-III AIFs.
Companies which were taxable under MAT earlier had to also pay MAT on any gains through investment in category-III AIFs even if the AIF had already paid capital gains tax but did not pay the MAT. For such companies which opt for the lower non-MAT tax regime now, it would also mean that they wouldn't have to pay this additional MAT after the AIF has paid capital gains taxes.
"To that extent the new regime makes it easier for AIFs and its corporate clients," said Rajesh H Gandhi, partner, Deloitte India.
Finance Minister Nirmala Sitharaman reduced corporation tax for companies with effect from October 1. New domestic manufacturing companies face taxation at the rate of 17.16 per cent. This includes a base rate of 15 per cent with an additional surcharge and cess.
Category-III AIFs have faced headwinds since the Budget. This is because a surcharge was raised, meaning any domestic fund with exposure to derivatives in their funds would face a tax rate of up to 42.7 per cent. A similar tax rate for foreign portfolio investors (FPIs) was rolled back after the Budget.
FPIs had been net sellers to the tune of over Rs 30,000 crore following the announcement of higher taxes in the Budget.
“In order to stabilise the flow of funds into the capital market, it is provided that enhanced surcharge introduced by the Finance (No 2) Act, 2019 shall not apply on capital gains arising on sale of equity share in a company or a unit of an equity-oriented fund or a unit of a business trust liable for securities transaction tax...,” said a government statement exempting surcharge on capital gains on sale of shares.
Foreign investors’ derivative exposure also got an exemption.
“The enhanced surcharge shall also not apply to capital gains arising on sale of any security including derivatives, in the hands of FPIs,” it said.
Category-III AIFs have total investments of Rs 33,208.4 crore, according to June data from the Securities and Exchange Board of India.