India approves pro-PE budget, defers GAAR

Private equity investments made before April 2017 won’t be retroactively taxed under the new rules

The Indian government has finally provided clarity for private equity investors in India on the General Anti-Avoidance Rule (GAAR), a regulation designed to prevent private equity firms and other investors benefitting from offshore tax havens.

In the country’s 2015 budget, finance minister Arun Jaitley said that GAAR would be deferred for another two years and will only apply to investments made on or after 1 April 2017, grandfathering any private equity deals which may have been subjected to the tax if applied retroactively.

It is welcome news for India’s private equity community, which had previously expressed concerns over the ambiguity of the proposed rules and whether existing investments would still be taxed under GAAR.

In July last year, the government avoided addressing concerns around the implementation of GAAR, which in particular impacts foreign institutional investors making profits in India, even when using an offshore structure, and did not defer its start date for another year as the industry had hoped, Private Equity International reported earlier.

The regulations had been due to come into effect on 1 April this year, but the deferral now gives private equity firms another two years to prepare for their arrival.

Moreover, foreign investment in domestically-registered alternative investment funds (AIFs) will now be allowed, facilitating the investment of overseas institutional investors in private equity or real estate funds, the budget stated.

Since prime minister Narendra Modi's election in May, the private equity industry has been optimistic about India’s future prospects.

As sentiment continued to rise, private equity firms invested the second highest amount ever recorded in the country during 2014, according to figures from data provider Venture Intelligence.

The value of private equity deal flow in India reached $10.9 billion last year, a 47 percent increase year-on-year and second only to the record $14.5 billion invested by the industry in 2007.

In his budget speech, Jaitley also said that India’s economy has turned around dramatically in the last nine months with the real GDP growth expected to accelerate to as much as 7.4 percent going forward.