In­dia's in­come-tax depart­ment eases norms gov­ern­ing for­eign fund man­agers

The Pak Banker - - 6BUSINESS -

The in­come-tax depart­ment on Wed­nes­day no­ti­fied rules re­lax­ing cer­tain ear­lier con­di­tions gov­ern­ing for­eign fund man­agers in a bid to en­cour­age them to move to In­dia. Presently, most of them man­age for­eign cap­i­tal to In­dia out of Sin­ga­pore, Dubai and Lon­don.

Fi­nance min­is­ter Arun Jait­ley in his bud­get speech last year had pro­posed steps to en­cour­age the re­lo­ca­tion.

"The present tax­a­tion struc­ture has an in­built in­cen­tive for fund man­agers to op­er­ate from off­shore lo­ca­tions. To en­cour­age such off­shore fund man­agers to re­lo­cate to In­dia, I pro­pose to mod­ify the Per­ma­nent Es­tab­lish­ment (PE) norms to the ef­fect that mere pres­ence of a fund man­ager in In­dia would not con­sti­tute PE of the off­shore funds re­sult­ing in ad­verse tax con­se­quences," he had said in the bud­get speech.

How­ever, in the fine print, there were cer­tain clauses that dis­suaded such fund man­agers from mov­ing to In­dia. On Wed­nes­day, the govern­ment set it right.

The new rules pro­vide for a preap­proval mech­a­nism un­der which a fund can seek prior ap­proval from the tax depart­ment and avail ex­emp­tion un­der Sec­tion 9A of the In­come Tax Act. This will pro­vide the much-needed cer­tainty to the off­shore funds. The sec­tion deals with treat­ment of in­come deemed to ac­crue or arise in In­dia, and is tax­able in In­dia.

The lat­est cir­cu­lar also clar­i­fied that in case the in­vest­ment in the fund is made di­rectly by an in­sti­tu­tional en­tity, the in­vestor in­ter­est in the fund will be de­ter­mined by look­ing through the en­tity. This see-through ap­proach in de­ter­min­ing the num­ber of in­vestors in the fund will help in meet­ing the cri­te­ria that a fund should have a min­i­mum of 25 mem­bers. Sameer Gupta, lead­er­fi­nan­cial ser­vices tax and reg­u­la­tory ser­vices at con­sult­ing firm EY, said the new guide­lines is an im­por­tant step for­ward for en­abling on­shore man­age­ment of for­eign cap­i­tal.

"In ad­di­tion to pro­vid­ing some im­por­tant clarifications in re­la­tion to the qual­i­fy­ing con­di­tions for the fund, the guide­lines pro­vide an op­tion to the fund to seek a prior con­fir­ma­tion of its el­i­gi­bil­ity by mak­ing an ap­pli­ca­tion to the CBDT (Cen­tral Board of Di­rect Taxes), some­thing which should give cer­tainty of tax out­come for the fund. We ex­pect global as well as do­mes­tic as­set man­age­ment firms to make an as­sess­ment of the po­ten­tial op­por­tu­nity and take ad­van­tage of this regime," he said.

Fur­ther re­lax­ing the con­di­tions, the rules say that the el­i­gi­bil­ity of the fund will be im­pacted only if the re­mu­ner­a­tion paid or payable by the fund to the fund man­ager has been de­ter­mined to be not at arm's length price or a price that would have been used for trans­ac­tion with an un­re­lated party for a pe­riod of three pre­vi­ous years in suc­ces­sion or for any three out of the pre­ced­ing four pre­vi­ous years.

A chance trans­fer pric­ing ad­just­ment made by the tax depart­ment will not im­pact the el­i­gi­bil­ity, it said. It also clar­i­fied that a fund will not be able to own more than 26% in an In­dian en­tity to avail ex­emp­tion.

Girish Van­vari, na­tional head of tax at KPMG In­dia, said a cou­ple of more clarifications are re­quired to at­tract more funds to set up base in In­dia. "It does not ad­dress two im­por­tant is­sues i.e. a sin­gle in­vestor can­not own more than 10% in the fund and 10 or less in­vestors should own 50% or less. In ad­di­tion one can ar­gue whether the re­quire­ment of own­ing 26% or less in a com­pany is ad­e­quate," he said in a note.

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