Safe Land­ing! No Pain, All Gain

The Economic Times - - Front Page - Palak.Shah@ times­group.com

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Th e gov­ern­ment on Wed­nes­day ex­empted For­eign Port­fo­lio In­vestors (FPIs) from the tax pro­vi­sions gov­ern­ing in­di­rect trans­fer of as­sets, set­ting aside a De­cem­ber cir­cu­lar that had sought to bring such trans­ac­tions­by­over­seasfundswith­intheam­bitof In­dian taxes. For­eign funds wel­comed the pro­posal. Over­seas fund man­agers had sought clar­ity on the Cen­tral Board of Direct Taxes (CBDT) cir­cu­lar that said FPIs would be sub­ject to tax on in­di­rect trans­fer of shares, a move the Street be­lieved would leave room for pro­tracted fu­ture lit­i­ga­tion and in­ter­na­tional ar­bi­tra­tion that In­dia has re­cently wit­nessed over the trans­fer of shares in­volv­ing UK mo­bile­phone com­pany Voda­fone.

Ac­cord­ing to the tax au­thor­i­ties, all in­come aris­ing from In­dian as­sets or through the trans­fer of a cap­i­tal as­set sit­u­ated in In­dia was to be deemed to ac­crue or arise in In­dia and taxed here. The Bud­get an­nounce­ment has now re­moved FPIs from the am­bit of such tax­a­tion.

“We are very pleased with tax-re­lated clar­i­fi­ca­tions in the Bud­get,” said Samir Arora, Sin­ga­pore-based fund manager of He­lios Cap­i­tal. “Non-ap­pli­ca­bil­ity of pro­vi­sions of for­eign trans­fer of un­der­ly­ing In­dian as­sets to FPIs is a ma­jor re­lief. Also, keep­ing the ten­ure for ap­pli­ca­bil­ity of long-term cap­i­tal gains to one year will make it eas­ier for FPIs to tran­si­tion to the new In­dia-Mau­ri­tius and Sin­ga­pore treaties.”

Usu­ally, large pen­sion and en­dow­ment funds al­lo­cate their cap­i­tal in lieu of redeemable units to step-down off­shore in­vest­ment ve­hi­cles, such as emerg­ing mar­ket (EM) funds. These funds further in­vest in Sin­ga­pore or Mau­ri­tius-based In­dia-fo­cused funds, which fi­nally de­ploy the money in In­dia. Since In­dian funds are sub­ject to se­cu­ri­ties trans- ac­tion and short-term cap­i­tal gains taxes, ex­perts ar­gued that tax­ing ul­ti­mate ben­e­fi­cia­ries too, on re­demp­tion of their units was dou­ble tax­a­tion.

Fi­nance Min­is­ter clar­i­fied that in­di­rect trans­fer pro­vi­sions will not ap­ply in case of re­demp­tion of shares or in­ter­ests out­side In­dia as a re­sult of, or aris­ing out of re­demp­tion, or sale of in­vest­ment in In­dia — trans­ac­tions that are charge­able to tax in In­dia.

On the sur­face, over­seas funds sounded op­ti­mistic, al­though tax ex­perts said further clar­i­fi­ca­tion from the gov­ern­ment was re­quired on the same tax law for other cat­e­gories of for­eign in­vestors, such as pri­vate eq­uity (PE) and ven­ture cap­i­tal (VC) funds.

“The Fi­nance Bill seems to have ad­dressed the in­di­rect trans­fer is­sue specif­i­cally for cer­tain cat­e­gories of FPIs but not di­rectly for pri­vate eq­uity in­vestors,” said Sid­dharth Shah, part­ner, Khai­tan & Co. “Of course, it may have been more de­sir­able if AIFs (alternative in­vest­ment funds), PEs, and VCs were in­cluded along­side FPIs, as they too, are reg­u­lated en­ti­ties,” Shah added. “Thereis­nore­a­sontono­tex­empt­cat­e­go­ryIIIFPIs­likePEsand VCs from tax un­der in­di­rect trans­fer of as­sets. In­vestors other than FPIs will ea­gerly await further clar­i­fi­ca­tion as promised in the Bud­get speech,” said Suresh Swamy, Part­ner, PwC. Both Shah and Swamy be­lieve that there is hope for PEs and VCs as well. “The Bud­get speech clearly sug­gested that the is­sue around dou­ble tax­a­tion of the same stream of in­come will be ad­dressed through a nec­es­sary clar­i­fi­ca­tion. This should ad­dress the con­cerns of the PE and VC funds to a great ex­tent,” Shah said.

Ex­perts say there is hope for pri­vate eq­uity and ven­ture cap­i­tal funds

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