Foreign investors were a happier lot after Finance Minister Nirmala Sitharaman proposed to expand coverage under the safe-harbour clause of the Income Tax Act. It defines the parameters by which a fund that invests in and operates from India can be exempted from taxation.
"With a view to reduce litigation and provide certainty in international taxation, we will expand the scope of safe harbour rules and make them more attractive," Sitharaman said in her Union Budget speech on July 23.
While no details on how this clause would be expanded were given, this news will be welcomed by industry insiders.
Capital market participants met the finance minister on June 20, asking for a review of the safe harbour clause under Section 9A of the Income Tax Act.
According to them, the clause, which was put in place in 2015 to encourage offshore funds to invest in India, needed more refining.
Under this clause, a fund will be exempt if it does not have a business connection in India. To establish that there is no business connection or tax residence in India, the fund and the fund manager have to meet certain conditions like threshold for aggregate participation and timeline for raising the minimum corpus.
According to capital-market insiders, this clause needs to be expanded for various reasons.
For one, there is a threshold set for individual investors' holding in the fund. "The aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed 5 percent of the corpus of the fund," it said.
Fund managers say that it is difficult to monitor if this threshold is being breached on a continuous basis, especially if an Indian entity is participating indirectly through separately set-up entities. They are also demanding that the threshold be raised from 5 percent to 10 percent.
Second, funds want the timeline set for raising the minimum corpus— of a monthly average of Rs 100-crore corpus—extended. The funds now have a year to raise this amount. They want this time period to be extended to three, if not five, years.
Third, they want the threshold of profit sharing with fund managers to be revised. The fund managers and connected entities cannot take more than 20 percent of the profits made by the fund through transactions done through the fund manager.
Experts pointed out that some of the provisions under the 9A IT Act do not apply to funds set up in Singapore and therefore funds set up through the International Financial Services Centre (IFSC) in GIFT City are at a disadvantage.
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