CBDT has issued Circular 12/2023, dated 12 July 2023, which provides clarification on the taxability of income earned by a non-resident investor from off-shore investments in an investment fund routed through an Alternative Investment Fund (AIF). This circular modifies the previous CBDT Circular 14/2019, issued on 3 July 2019, to accommodate changes made in the definition of ‘investment fund’ under the Income-tax Act, 1961.
The Finance Act of 2023 introduced an amendment to the Income-tax Act, 1961, which expanded the definition of ‘investment fund’ to include reference to the International Financial Services Centres Authority (Fund Management) Regulations, 2022, enacted under the International Financial Services Centres Authority Act, 2019.
In light of this amendment, Paragraph 3 of the Income Tax Circular 14/2019 is modified as follows:
“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 and their investors. In this context, ‘investment fund’ is 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 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).”
It is important to note that all other contents of Income Tax Circular 14/2019 remain unchanged, except for the modification mentioned above.
CBDT Income Tax Circular 12/2023 dated 12/07/2023: Clarification on Amendments in Taxation of Non-residents for Off-Shore Investment via AIF