CBDT vide Circular No. 12/2023 dated 12.07.2023 has clarified the taxability of income earned by a non-resident investor from off-shore investments in an investment fund routed through an Alternative Investment Fund.
This circular modifies the definition of ‘investment fund’ in para 3 of an old Circular No. 14/2019 issued on 03.07.2019 in view of the amendment in the definition of 'investment fund' under section 115UB of the Income-tax Act, 1961 (‘Act’) by the Finance Act. 2023.
The rest of the contents of the old circular of 2019 shall remain the same.
The definition of 'investment fund' was amended to include a reference to International Financial Services Centres Authority (Fund Management) Regulations. 2022 under International Financial Services Centres Authority (IFSCA) Act. 2019.
Prior to the amendment, ‘investment fund’ only included any fund established or incorporated in India registered as a Category I or a Category II Alternative Investment Fund under the SEBI regulations.
After the amendment, ‘investment fund’ not only includes a fund established or incorporated in India registered as a Category I or a Category II Alternative Investment Fund under the SEBI regulations but also includes a fund registered under the IFSC regulations.
The Old Circular of 2019 states that the incidence of tax arising from off-shore investment made by a non-resident investor through the AIFs would depend on the determination of the status of income of a non-resident investor as per provisions of section 5(2) of the Act.
As per section 5(2) of the Act, the income of a person who is non-resident, is liable to be taxed in India if it is received or is deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India.
It was clarified that any income in the hands of the non-resident investor from off-shore investments routed through the Category I or Category II AIF, being a deemed direct investm~nt outside India by the non-resident investor. is not taxable in India under section 5(2) of the Act.
It was further clarified that loss arising from the off-shore investment relating to a non-resident investor, being an exempt loss, shall not be allowed to be set-off or carried-forward and set off against the income of the Category I or Category II AIF.
Read the full text of CBDT Circular No. 12/2023 dated 12.07.2023 on Clarification on Taxability of Non-resident Investor's Offshore Income through AIF
Circular No. 12/2023
F.No.225/79/2019-ITA-II
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North-Block, New Delhi, dated the 12th July,2023
Subject: Clarification regarding taxability of income earned by a non-resident investor from off-shore investments in investment fund routed through an AlternatiYe Investment Fund -reg.
CBDT Circular No.14/2019 dated 03.07.2019 was issued to clarify the taxability of income earned by a non-resident investor from outside India (off-shore investment) routed through investment fund as defined in Explanation 1(a) to Chapter XII-FB of the Income-tax Act. l961(the Act). This Circular was made applicable to Category I or Category II Alternative Investment Funds (AIFs), regulated under Securities and Exchange Board of India (SEBI) regulations.
2. By Finance Act, 2023, the definition of ‘investment fund’ under the Income-tax Act, 1961 was amended to include reference to International Financial Services Centres Authority (Fund Management) Regulations, 2022 under International Financial Services Centres Authority (IFSCA) Act, 2019.
3. In view of the aforesaid amendment in the definition of ‘investment fund’, para 3 of the Circular No.14/2019 dated 03.07.2019 is to be read as under:
“3. Chapter XII-FB contains special provisions relating to tax on income of investment funds and income received from such funds. Under Chapter XII-FB, section 115UB of the Act (‘Tax on income of investment fund and its unit holders’) is the applicable provision to determine the income and lax-liability of investment funds & their investors. In this context, ‘investment fund’ is defined in Explanation 1 of Chapter XII-FB to mean any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019). Thus, provisions of section 115UB apply only to Category I or Category II AIFs regulated by Securities and Exchange Board of India (SEBI) or International Financial Services Centres Authority (IFSCA).”
4. All the other contents of the Circular dated 03.07.2019 remain same. It may be circulated widely for information of all stakeholders and Departmental officers.
5. Hindi version to follow.
(Dr.Castro Jayaprakash.T)
Under Secretary (ITA.II), CBDT
Download CBDT Circular No. 12/2023 dated 12.07.2023 on Clarification on Taxability of Non-resident Investor's Offshore Income through AIF in PDF format
Read the full text of Old CBDT Circular No. 14/2019 dated 03.07.2019 on Clarification on Taxability of Non-resident Investor's Offshore Income through AIF
Circular No. 14/2019
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North-Block, New Delhi, dated the 3rd of July, 2019
Subject: Clarification regarding taxability of income earned by a non-resident investor from off-shore investments routed through an Alternate Investment Fund-reg.
In the context of Alternate Investment Funds (AIFs), references have been made to the Central Board of Direct Taxes (the Board) seeking clarity regarding taxability of income from investments made by the non-resident investor through these AIFs, outside India (off-shore investment).
2. The incidence of tax arising from off-shore investment made by a non-resident investor through the AIFs would depend on determination of status of income of non-resident investor as per provisions of section 5(2) of the Income-tax Act, 1961 (Act). As per section 5(2) of the Act, the income of a person who is non-resident, is liable to be taxed in India if it is received or is deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India.
3. Chapter XII-FB contains special provisions relating to tax on income of investment funds and income received from such funds. Under Chapter XII-FB, section 115UB of the Act ( ‘Tax on income of investment fund and its unit holders’) is the applicable provision to determine the income and tax-liability of investment funds & their investors. In this context, “investment fund” is defined in Explanation 1 of Chapter XII-FB to mean any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992). Thus, provisions of section USUB apply only to Category I or Category II AIFs, as defined in SEBIs regulations.
4. By an overriding effect over other provisions of the Act, sub-section (1) of section 115UB of the Act provides that any income accruing or arising to, or received by, a person, being a unit holder of an investment fund, out of investments made in the investment fund, shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to, or received by, such person had the investments made by the investment fund been made directly by him and not through the AIF.
5. The matter has been considered by the Board. As section 115UB(1) of the Act provides that the investments made by Category I or Category II AIFs are deemed to have been made by the investor directly, it is hereby clarified that any income in the hands of the non-resident investor from off-shore investments routed through the Category I or Category II AIF, being a deemed direct investment outside India by the non-resident investor. is not taxable in India under section 5(2) of the Act.
6. It is further clarified that loss arising from the off-shore investment relating to non-resident investor, being an exempt loss, shall not be allowed to be set-off or carried-forward and set off against the income of the Category I or Category II AIF.
7. The contents of this Circular may be circulated widely for information of all stakeholders and departmental officers.
8. Hindi version to follow.
-sd-
(Rajarajeswari R.)
Under Secretary (ITA.II), CBDT
(F.No. 225/79/2019-ITA.II)
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