GIFT City AIF Tax Notices: What Funds Need to Do
Tax treatment
Some Category III Alternative Investment Funds located in GIFT City have received tax notices seeking surcharges on dividend and interest income for assessment years 2024-25 and 2025-26.
The notices are apparently not in sync with existing tax norms on surcharge applicable to such funds, said tax experts.
Specified Category III AIFs located at GIFT City are liable for a flat 10 per cent tax on income from securities such as dividends and interest, without a surcharge. The flat 10 per cent rate was introduced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, effective from FY21, or the 2021-22 assessment year.
The surcharge exemption on that 10 per cent tax was introduced by the Finance Act, 2023, applicable from FY24, or the 2024-25 assessment year.
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Who it affects
The notices concern Category III AIFs in GIFT City and the taxation of dividend and interest income.
Domestic Category III AIFs pay a surcharge of 10-15 per cent on dividend income and 10-37 per cent on interest income. There is no such surcharge applicable on specified funds-category III AIFs located at GIFT City.
Resolution and appeal
- Such cases should get resolved by seeking a rectification of the demand if the recovery of surcharge and cess is erroneous.
- If the issue does not get resolved by filing a rectification, the GIFT City fund might have to undergo the process of filing an appeal to the Commissioner of Income Tax (Appeals).
- Funds are talking with the IFSCA authorities and the tax department on the matter.
Many of the notices are likely to be automated notices sent on account of system errors or contain standard questions that may or may not be relevant to the taxpayers’ structure and circumstances, according to Pranay Bhatia, founder and managing partner of EFFIINEXT Advisory.
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