I-T dept eases norms further to woo foreign fund managers

Even after the Budget amending the norms, they didn't shift due to imposition of stiff conditions

The income tax (I-T) department has further relaxed conditions for offshore funds from 121 countries to encourage overseas fund managers shift base to India. The move — aimed at funds run by Citi, Morgan Stanley and JP Morgan, among others — would cover Mauritius and Singapore, but not Hong Kong. 

The 2015-16 Budget had made some exemptions by amending the permanent establishment (PE) norms. Mere presence of a fund manager in India did not make it a PE of the offshore fund. This exempted these fund managers from corporate tax even if located in India. They only had to pay capital gains tax. 

While corporate tax on foreign funds is 40 per cent, short-term capital gains tax is 15 per cent and long-term capital gains tax in listed securities is zero. 

Despite the amendment in the Budget, the fund managers did not shift to India because of stiff conditions. The department in March further relaxed some conditions but to no avail. 

The Central Board of Direct Taxes (CBDT) has now said three tough conditions would not apply to funds set up by Category-I and -II of foreign portfolio investors (FPIs) shifting to India from these 121 countries. These would not be treated as PE of the funds. 

These two categories of FPIs include sovereign wealth funds, multilateral organisations, banks, pension funds, insurance companies, mutual funds, investment trusts, and asset management companies. 

Earlier, a fund was said to not have a business connection with India if it had minimum 25 members directly or indirectly not connected with each other; a member of the fund along with connected persons did not have more than 10 per cent stake, and the aggregate stake of 10 or fewer members along with their connected persons in the fund was less than 50 per cent. 

Most of these funds do not meet these conditions. Besides, there are fund-of-funds that invest through one entity. These cannot be treated as just one investor, these funds had argued while showing reluctance to shift to India. 

Now, these conditions will not apply to funds set up by FPIs’ Category-I and -II if  these come from countries such as Mauritius, Singapore, Switzerland, the Netherlands, explained Amit Maheshwari of Ashok Maheshwary and Associates. “The relaxed conditions should now facilitate shifting of India-focussed funds to India.” 

Rajesh Gandhi of Deloitte said Hong Kong has not been included in the list of 121 countries whose funds will be eligible for the exemption. "This is notable because HK is home to several NRI, PIO fund managers," he said.

For instance, he said Franklin Templeton Investments (Asia), JPMorgan Sar Asian Fund, HSBC Multimanager Asian-Pacific Equity Fund are Hong Kong-based.