The Central Board of Direct Taxes (CBDT) has clarified the taxability of Income earned by Non-Resident Investor from off-shore Investments in Investment Fund routed through Alternative Investment Fund, vide circular no. 12/2023 on 12th July 2023.
The CBDT Circular No. 14/2019, issued on 3rd July 2019, aimed to provide clarification regarding the taxation of income derived by non-resident investors from offshore investments made through investment funds, as defined in Explanation I (a) of Chapter XII-FB of the Income-tax Act, 1961.
This circular specifically applied to Category I or Category II Alternative Investment Funds (AIFs) regulated under the Securities and Exchange Board of India (SEBI) regulations.
Through the Finance Act of 2023, an amendment was made to the definition of “investment fund” within the Income-tax Act, 1961. This amendment included a reference to the International Financial Services Centres Authority (Fund Management) Regulations of 2022, which are established under the International Financial Services Centres Authority (IFSCA) Act of 2019.
The Investment Fund defined in Explanation I 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 1 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 SEBI Act 1992 or regulated under International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019). Thus, the provisions of Section 115UB of Income Tax Act apply only to Category I or Category II AIFs regulated by SEBI or International Financial Services Centres Authority (IFSCA). The remaining contents are the same.
According to the old circular No. 14/2019, 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.
It is further clarified in the old circular that loss arising from the off-shore investment relating to non-resident investors, being an exempt 1055, 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.
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