Offshore Funds: Tax Clarity?

In what could result in a huge relief for the Indian fund industry, the Finance Ministry has nudged the CBDT to issue a clarification on the taxation of fund managers of an offshore fund. The Ministry believes that fund managers managing offshore funds are being driven out of India to locations like Singapore due to adverse tax provisions. Payaswini Upadhyay has this exclusive report on how the CBDT may address this issue.

Sources tell CNBC-TV18 that in a letter dated September 9th, the Finance Ministry directed the CBDT to clarify that that simply because a fund manager of an offshore fund is located in India, it would not constitute a business connection. The concept becomes important because once a business connection is constituted; the Indian fund becomes a permanent establishment liable to be taxed at 40%.

Nishchal Joshipura
Head: Funds Practice, Nishith Desai Associates
"Currently, the way the funds have been operating is they have Indian advisory company which makes non-binding recommendations on the investment and divestment to the offshore fund management entity and in turn the offshore fund management entity makes recommendations to the fund. And the Board of the fund ultimately takes a decision on whether to invest or divest from India. But the issue which comes up is because on the ground presence is required, especially in case of private equity funds because there is lots of ground work which needs to be done, the core team usually sits in India."

Several countries including the United Kingdom, Singapore, Hong Kong, United States, New Zealand provide for a safe harbour to prevent offshore funds from having a taxable presence in their respective jurisdictions. Industry is expecting a similar clarity from the CBDT.
 
Nishchal Joshipura
Head: Funds Practice, Nishith Desai Associates
"What I would like to see is clarity on the list of activities which a fund manager can do- so may be lets take a list of 10 activities - as long as the fund manager is doing those 10 activities, the tax authorities should not be going into whether those activities could still constitute permanent establishment."

In India, offshore funds face the risk of high tax rate and consequently lower returns and that makes India a less attractive destination for pooling capital. The expected clarification from the CBDT will address this concern and may be bring the fund managers back home!

In Mumbai, Payaswini Upadhyay