There is some good news for venture capitalists (VCs), private equity (PE) firms, angel investors, and hedge funds. In Budget 2017, Finance Minister, Arun Jaitley may propose creation of a favourable tax environment for these Alternative Investment Funds (AIFs). This would be part of the broader strategy of the government to ease the flow of funds for SMEs and start-ups. SEBI panel on AIFs headed by N. R. Narayana Murthy recently made certain key recommendations. The government is likely to draw insights from these recommendations and announce relevant measures in the Union Budget for 2017-18. One of the measures the government is examining includes providing hedge funds or Category III AIFs with a tax pass-through status. Thus, rather than taxing the fund, income would be taxed only at the investor's end.

1. Budget 2017 – Tax benefits in store for
Alternative Investment Funds?
There is some good news for venture capitalists (VCs), private equity (PE)
firms, angel investors, and hedge funds. In Budget 2017, Finance Minister,
Arun Jaitley may propose creation of a favourable tax environment for these
Alternative Investment Funds (AIFs). This would be part of the broader
strategy of the government to ease the flow of funds for SMEs and start-ups.
SEBI panel on AIFs headed by N. R. Narayana Murthy recently made certain
key recommendations. The government is likely to draw insights from these
recommendations and announce relevant measures in the Union Budget for
2017-18. One of the measures the government is examining includes providing

2. hedge funds or Category III AIFs with a tax pass-through status. Thus, rather
than taxing the fund, income would be taxed only at the investor's end.
AIF pool in funds from high net-worth individuals (HNIs) and invests those
funds in various unlisted securities, SMEs, and start-ups with the main goal of
promoting entrepreneurship. In the past decade, VC and PE funds have
invested huge sums into the growing e-commerce industry of India. This was
driven primarily by a positive sentiment that the mobile Internet space is
expanding rapidly in India.
As per a study by Nasscom and Zinnov Consulting, in terms of number of
start-ups, India is the third highest globally with the US and the UK being the
first and second. Moreover, there were some highly interesting insights that
the study provided. As per the study, around 4 new start-ups enter the Indian
market each day. As of today, Indian start-ups have received funding to the
tune of ~$5 bn through AIFs. As per the Narayana Murthy Panel's report, more
than 3000 Indian companies spanning 12 top sectors have received more than
$100 bn in terms of funds from AIFs during 2001-2015.
SEBI classified AIFs into the three broad categories in 2012:
Category I AIFs – These are infrastructure or social venture funds that have a
positive impact on the Indian economy.
Category II AIFs – PE, VC, and Debt funds come under this category
Category III AIFs – This category includes hedge funds.
The committee has recommended some major changes in terms of taxation
policy adopted for AIFs, which include introduction of securities transaction
tax (STT) for PE and VC investments. The committee believes this has worked

3. well for foreign portfolio investors (FPIs) for many years in case of foreign
portfolio investors. Moreover, the committee recommended certain minor
adjustments to the safe harbour norms. Further, the panel suggested that the
government must exempt companies that raise funds from overseas investors
from paying service tax.
Finance Minister, Arun Jaitley had announced tax pass-through status for
Category I and II AIFs in Union Budget 2015. Therefore, all eyes will be on Mr.
Jaitley during Union Budget 2017.