Foreign sovereign wealth funds (SWFs) and pension funds are seeking an extension of the tax exemption for investments in the infrastructure sector in the upcoming Union Budget.
The beneficial tax regime for such investors ends March 31 and the industry wants a three-year extension to attract more foreign capital in the space.
The income tax act — Section 10(23FE) — exempts dividend, interest and long-term capital gains accrued on infrastructure investments made in India.
In the absence of a clarification in the Budget, sovereign wealth funds will have to pay tax on these investments on par with other off-shore investors, experts said.
The development assumes significance as several leading SWFs have used this regime to make investments in the infrastructure space.
Marquee SWFs, including Abu Dhabi Investment Authority (ADIA) and the Canada Pension Plan Investment Board (CPPIB), are among those who received the exemption, various notifications of the tax department showed.
Given the weakening of the rupee and a softer market, India would need to attract more foreign flows into crucial sectors, experts said.
“To boost further investment in the Indian infrastructure space, the Indian government should consider extending the income-tax exemption that it currently grants to notified SWFs and notified Foreign Pension Funds (‘FPFs’) on their investments to be made in qualifying infrastructure projects and which is set to expire on March 31, 2025, by at least another three years,” said Russell Gaitonde, Partner, Deloitte India. “This is essential to attract fresh patient capital into the Indian infrastructure space.”
The government should also look at expanding the scope of current exemptions, Tax experts said. For instance, it is a common practice among foreign funds to pool their investment outside India. For sectors like infrastructure, where funds often form a consortium to make investments, an offshore entity holds the SWF investment.
At present, the exemption applies to only domestic platforms. It should be extended to off-shore platforms as well, experts said.
“Such an exemption is essential to provide long-term capital gains exemption to notified SWFs and notified FPFs on their exits from such foreign platforms, where the Indian indirect transfer provisions get triggered,” Gaitonde said.
These benefits do not automatically apply to all the SWFs or pension funds. To be eligible, the Centre has to issue a notification providing the exemption.
“Extending the sunset clause for tax incentives under Section 10(23FE) beyond March 2025 is crucial to maintaining foreign investment in infrastructure, a critical driver of India’s development,” said Keyur Shah, financial services tax leader, EY India.
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