Budget new rules on holding firms queer pitch for sovereign, pension funds

A proposed regime requiring investments through holding companies may have tax implications, say experts

The Union Budget 2021-22 has made it easier for sovereign wealth funds and pension funds to invest in Indian infrastructure projects, but some of the new rules may need more clarity, experts said. The proposed regime requiring investments through holding companies may have adverse tax implications for such funds and may create an arbitrage between the new and old projects, they said. Besides, the ownership structure of holding companies through which investments are to be made requires further clarification, they added.  

"While investments can be made through holding company (holdco) structures, such holdcos themselves have not been given tax pass-through status, resulting in perhaps an unintended tax leakage,” said Rajesh H Gandhi, partner at Deloitte Haskins & Sells. 

Pass-through status means that the investor pays tax on the income earned rather than the fund. The absence of this would mean higher taxes for the fund.

Tushar Sachade, partner, PricewaterhouseCoopers, said while the exemption clarified many of the issues that these funds faced, the benefit seemed limited to newly set-up Indian holding companies. This may create an imbalance between the existing and new entities, he said. “Investors such as sovereign wealth funds and pension funds prefer to invest in existing/semi-existing platforms, which, under the proposed provisions, may not be eligible for the exemption. It may be worthwhile for the government to clarify that this benefit would also be available in respect of existing platforms,” he said.

The last Budget had provided a 100 per cent tax exemption to sovereign and pension funds investing in Indian infrastructure. Some of the conditions to avail of this tax break were seen to be onerous. These were eased in the latest Budget. “In order to ensure that a large number of funds invest in India, I propose to relax some of these conditions relating to the prohibition on private funding, restriction on commercial activities, and direct investment in infrastructure,” Finance Minister Nirmala Sitharaman had said in her Budget speech.

Anish Mashruwala, partner, J Sagar Associates, said the relaxations for holding companies only seemed to apply to investments in new projects. “This may mean that any fresh capital via the holding company route would not come into existing infrastructure projects on the same terms, even though many of them would also be in need of funds," he said. There is also lack of clarity around the shareholding funds are required to have in their holding company, and if it is supposed to be wholly owned by them, he said.

Amit Singhania, partner at Shardul Amarchand Mangaldas & Co, said there was no definition of what would qualify as sovereign wealth fund. There is a possibility that sovereign funds may not be organised internally as a dedicated fund and this creates a bit of ambiguity regarding the applicability of tax exemption, he said.  

This may apply, for example, to sovereign funds that operate as a department within the government which makes investments, rather than being formally structured as a fund.

While many concerns have been addressed, according to Deloitte’s Gandhi, there were expectations that the benefits would be expanded to large private equity and mutual funds, cover secondary acquirers, and clarify the applicability of the benefit to the renewable energy sector.