AIPAC
Also written Alternative Investment Policy Advisory Committee
SEBI's Alternative Investment Policy Advisory Committee, headed by Shri Narayan Murthy — its recommendations shape AIF valuation guidelines and proposals on Category III tax and GST.
In plain language
AIPAC is SEBI's Alternative Investment Policy Advisory Committee. The workbook brings it up while telling how Category III AIFs grew between 2012 and 2019. AIPAC was headed by Shri Narayan Murthy. It made important recommendations with two aims. One was to improve the tax regime for Category III AIFs. The other was to boost capital from domestic institutional investors. These include banks, insurance companies, pension funds, charities, family offices and HNIs.
AIPAC matters in three ways in this paper. First, its recommendations are built into a live regulation on valuation. Second and third, it has made two tax proposals. One is on GST. The other is on how capital gains on Category III units are taxed. The workbook explains both in detail.
Keep its status clear. AIPAC is an advisory committee. Its tax proposals are recommendations. They are not the current law that the rest of Chapter 9 describes.
How it works
1. Valuation guidelines (Chapter 5, 5.16.6). Securities not covered by the SEBI (Mutual Funds) Regulations valuation norms are valued under guidelines endorsed by an AIF industry association representing at least 33% of the number of SEBI-registered AIFs. That association must endorse guidelines after taking into account AIPAC's recommendations.
2. GST (Chapter 9, 9.4). An offshore fund's management fee for foreign investors is export of services and GST-free, but an India-domiciled Category III AIF with overseas investors pays GST. To enhance pooling in Indian AIFs, AIPAC recommended:
| Foreign investment in the AIF | Recommended GST treatment |
|---|---|
| 100% (excluding domestic sponsor commitment), fund management located in India | Exempt — services consumed outside India are export of services |
| At least 50% | Zero rate or a lower rate, such as 5% |
3. Capital gains on transfer of units (Chapter 9, 9.6). The Act's definition of capital asset does not include Category III AIFs for computing gains on their units. AIPAC recommended adding Category III AIFs to the definition of equity-oriented investment fund:
- If it invests in units of another fund traded on a recognised Indian exchange: at least 90% of its proceeds in such units, and the investee fund(s) invest at least 90% in listed domestic equity.
- In any other case: more than 65% of proceeds in listed domestic equity.
- Percentage measured on the annual average of monthly averages of opening and closing NAV.
An equity-oriented fund's units attract 20% short-term and 12.5% long-term capital gains tax; otherwise, slab rates.
A worked example
Illustrative figures — testing three funds against AIPAC's proposed equity-oriented definition.
| Fund | Portfolio | Test | Qualifies? |
|---|---|---|---|
| Alpha Cat III AIF | Annual average of 70% in listed Indian equity | More than 65% | Yes |
| Beta Cat III AIF | 92% in units of a listed fund that holds 95% listed Indian equity | 90% and 90% | Yes |
| Gamma Cat III AIF | 88% in units of such a fund, which holds 95% equity | 90% and 90% | No — 88% is below 90% |
Why it matters to an investor. Ms Farah Khan sells Alpha units held for 18 months with a gain of Rs 40 lakh, and is in the 30% slab:
If Alpha counts as equity-oriented: 12.5% × Rs 40 lakh = Rs 5 lakh
If it does not (slab rate): 30% × Rs 40 lakh = Rs 12 lakh
Difference = Rs 7 lakh
(Surcharge, cess and the Rs 1.25 lakh exemption ignored for simplicity.)
GST proposal. A Category III AIF with 55% foreign investment charging a Rs 3 crore management fee pays 18% = Rs 54 lakh GST today; at AIPAC's suggested 5% it would be Rs 15 lakh.
Why NISM asks about it
Chapter 2 (Growth of AIFs in India and Suitability of Category III AIFs) names AIPAC and its chair in the 2012–2019 developments. Chapter 5 (Regulatory Framework) makes AIPAC's recommendations an input to industry valuation guidelines. Chapter 9 (Taxation) sets out its GST and equity-oriented-fund recommendations. Expect "which committee" and "headed by whom" questions, and the 100% / 50% GST thresholds.
Common exam traps
- AIPAC is SEBI's committee, headed by Shri Narayan Murthy — not a tax authority or an industry body.
- Its tax proposals are recommendations. Under the workbook's current-law description, India-domiciled Category III AIFs pay GST on management fees and Category III units are outside the capital asset definition for these gains.
- GST: 100% foreign → exempt; at least 50% foreign → zero or lower rate such as 5%. The 100% figure excludes domestic sponsor commitments.
- Equity-oriented test: 90%/90% for funds of listed funds; more than 65% otherwise, on annual average of monthly averages of opening and closing NAV.
- Valuation: an industry association with at least 33% of registered AIFs endorses guidelines after considering AIPAC — SEBI does not write those guidelines itself.
Check yourself
1.Category III AIFs operating from GIFT City:
- a)pay GST on services received from external providers but are exempt from GST on management fees
- b)are exempt from GST, so fees payable to the investment manager, trustee and external service providers are not taxable
- c)pay GST at a concessional rate of 5 per cent on all services
- d)pay full GST but may claim input tax credits against their output liability
Show the answer
Answer: (b) are exempt from GST, so fees payable to the investment manager, trustee and external service providers are not taxable
The workbook's sample question describes a partial exemption and marks it False. Category III AIFs operating from an IFSC are exempt from GST. Hence, the fees payable to the investment manager, trustee and the external service providers, are not taxable. Option (c) is the AIPAC recommendation for funds with at least 50 per cent foreign investment, not the current position for IFSC funds. Option (d) misstates the general position: an AIF is eligible for input credits but has no output GST liability, so the credits are unusable.
Where this is taught
Free preparation for NISM Series XIX-BRelated terms
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Equity-oriented Investment FundA Category III AIF that invests over 65% (or 90% via another fund) of its proceeds in listed domestic equity shares — taxed at 20% short-term and 12.5% long-term capital gains rates, per SEBI's AIPAC.
- Independent ValuerThe valuer of a Category III AIF's unlisted holdings — not an associate of manager, sponsor or trustee, with 3 years' experience, and IBBI-registered with a professional membership or a CRA group entity.
- Offshore Fund StructureA structure used when there is no intent to pool capital in India: the pooling vehicle is domiciled abroad, such as in Mauritius or Singapore, takes offshore investors' money and invests directly into Indian companies.
- Onshore FundA fund created by a domestic investment manager and domiciled in India, pooling capital from resident and foreign investors, registered under the SEBI (AIF) Regulations with its PPM filed through a merchant banker.
- Goods and Services TaxA destination-based tax on consumption, levied at every stage from manufacture to final consumption, with credit for tax paid at earlier stages available as setoff so that only value addition is taxed.