SEBI, IFSCA-recognised Category I and II AIFs exempted from PAN requirement

For expeditious onboarding of foreign investors, the Central Board of Direct Taxes has amended the Income Tax rules to exempt various categories of Alternative Investment Funds (AIFs), including those located in International Financial Services Centres, from the requirement of a Permanent Account Number (PAN). Experts say this move will also ensure continuity of reforms for foreign investors.

A notification, dated July 21, provided for substituting a clause in the rule (157) which exempts persons from obtaining a PAN. Now, the clause defines specified fund means any fund established or incorporated in India in the form of a trust, a company, 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 (AIF) and is regulated under SEBI regulations or the International Financial Services Centres Authority (Fund Management) Regulations. Category III AIFs are already exempted.

Category I AIFs invest in start-up or early-stage ventures, social ventures or SMEs, infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable. These include venture capital funds, SME Funds, social venture funds, and infrastructure funds. AIFs which do not fall in Category I and III and which do not undertake leverage or borrow other than to meet day-to-day operational requirements.

These include various types of funds, such as real estate funds, private equity (PE) funds, distressed asset funds, etc. Category III AIFs are those that employ diverse or complex trading strategies and may use leverage, including through investments in listed or unlisted derivatives. Various types of funds, such as hedge funds and PIPE Funds, are registered as Category III AIFs.

Experts say the amendment will help with faster onboarding. According to Amit Maheshwari, Managing Partner, AKM Global, by extending the eligibility from the earlier Category III AIFs to Category I and Category II, regulated by SEBI and the International Financial Services Centres Authority (IFSCA), the amendment widens the ambit of the existing framework and aligns it with the evolving investment landscape.

Obtaining a PAN has often been viewed by overseas investors, particularly those with passive investments, as an additional compliance requirement. Extending the PAN exemption framework to Category I and Category II AIFs removes a practical bottleneck in fund investments. “This reform should facilitate faster onboarding of foreign investors while enhancing the competitiveness of India’s alternative investment fund ecosystem removing procedural barrier. Collectively, such measures reaffirm the Government’s commitment to fostering a globally competitive fund management ecosystem and strengthening India’s position as an attractive international investment destination,” he said.

Meanwhile, some experts see the new notification as a continuation of reforms. Richa Sawhney, Partner (Tax) at Grant Thornton Bharat, said that the PAN exemption framework for eligible non-resident investors investing through specified funds existed under the earlier tax regime as well. This notification ensures that investors in Category I and Category II AIFs, including eligible IFSC-based funds, continue to remain covered under the new Rules by expressly including such funds within the definition of ‘specified fund’. “The amendment therefore preserves the existing compliance relief available to investors in these funds and provides continuity and certainty to global investors,” she said.