The requirement for meeting broad-based conditions to qualify for a safe harbour under Indian tax laws will apply to category-II foreign portfolio investors (FPIs) even as category-I investors would remain exempt, the government clarified in a notification on Tuesday.
This may dissuade category-II FPIs, especially funds from Cayman Islands, British Virgin Islands and West Asian countries, from delegating fund management responsibilities to Indian fund managers, said experts.
Under 20 per cent of FPIs currently fall under category-II. Category-II FPIs are already at a disadvantage as they have to abide by indirect transfer provisions. Such provisions apply to funds that have deployed more than 50 per cent of their portfolio investments in India.
"The notification was necessitated given the change in the FPI regime. Category-I FPIs desirous of availing fund management - safe harbour need not comply with the investor diversification rules prescribed. Category-II FPIs may have a few more hurdles to cross and would need to evaluate delegation of fund management to Indian asset managers," said Tushar Sachade, partner, PwC India.
In 2017, the government had exempted category-I and -II FPIs from meeting the broad-based rules under sub-section 3e, 3f and 3g of section 9A of income tax rules (see table).
Last year, the Securities and Exchange Board of India (Sebi) merged three FPI categories into two. The regulator also did away with the broad-based criteria for FPIs altogether.
"It would have been better if the CBDT had harmonised the tax law in section 9A with the new FPI Regulations by providing exemption from meeting broad-based criteria in section 9A to both Category I & II FPIs. By requiring Category II FPIs to meet the broad basing conditions in section 9A, the tax law limits the ability of Indian fund managers to manage even regulated funds set up in non FATF member countries," said Tejas Desai, partner, EY India.
"The fund management - safe harbour provisions are the equivalent of "Make in India" for the asset management industry. The CBDT should have taken a cue from Sebi and extended the concession from investor diversification to both Category I and Category II FPIs," added Sachade.
Aravind Srivatsan, partner at Nangia Andersen, however, believes that the latest notification along with the recent rules prescribing minimum remuneration to be earned by the fund managers to enjoy the safe harbour exemption provides clarity for fund managers for actively evaluating India as a fund management jurisdiction.
The Finance Act, 2015, had introduced Section 9A to encourage fund management activity from India and provide a safe harbour to onshore management of offshore funds.
The objective was to ensure these funds did not pay incremental tax just because they were managed in India and the risk of constituting business connection or a permanent establishment in India was mitigated. Without the benefit of this section, an offshore fund managed in India becomes a tax resident.
The government has been incrementally relaxing norms over the past few years. Yet, only a handful of funds have got the nod under Section 9A so far, which is why experts believe bolder reforms are required and several restrictive conditions in the section need a re-look.
First Published: Wed, July 01 2020. 18:48 IST
July 01, 2020 at 08:18PM
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Broad-based criteria for safe harbour to apply to category-II FPIs - Business Standard
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