Surcharge hike may stop overseas fund managers from shifting to India

Several fund professionals based in India could also relocate to other jurisdictions, resulting in a brain drain

The recent hike in surcharge may dissuade overseas money managers from shifting to India and result in a flight of senior fund professionals, who advise global private equity players, to countries such as Singapore and Hong Kong, which have far lower personal income tax rates.

Several offshore fund managers of Indian origin, who manage the India units of their global portfolios, have been keen to shift to the country as it will enable them to locally connect with bankers, analysts, institutional investors, as well as the company’s management.

The shift was not possible because of the adverse tax impact, given that the presence of a fund manager in India could entail business connection, permanent establishment, and tax residence risks for offshore funds.

To address this gap, the Finance Bill, 2015, had introduced section 9A in the I-T Act, 1961, to provide a safe harbour regime for the onshore management of offshore funds. Despite the onerous rules, the government has been giving concessions to make the shift practically feasible.

In May this year, the Central Board of Direct Taxes (CBDT) had clarified that asset management companies (AMCs) approved under Sebi regulations would be considered eligible fund managers under section 9A. This allows Indian AMCs to directly conduct fund management activity for offshore funds. 

The government also provided some relief in the Budget by relaxing two minor conditions under section 9A. A few funds were recently granted approvals under this regime. The surcharge hike could, however, undo the progress made so far.

"The increase in surcharge will adversely impact fund managers planning to shift to India to benefit from the section 9A regime, because the comparative cost of moving to India will rise further," said Rajesh Gandhi, partner at Deloitte Haskins & Sells.

Gandhi added that the personal tax rates in India were, in any case, higher than those Singapore and Hong Kong even before the surcharge.

Further, several fund professionals based in India could relocate to other jurisdictions, resulting in a brain drain. Many of the top global PE firms such as Blackstone, KKR, and Warburg Pincus have advisory entities based in India comprising senior fund professionals. These are relatively mobile and may look to provide such services from Hong Kong and Singapore, said experts.

“The Budget has given some relief, but the more important conditions — such as the requirement to trace resident Indian ownership in the fund, as well as for the fund and fund manager not to be connected — need a re-look. The increased 'super rich' surcharge will also dissuade fund managers located in Singapore and other countries from moving to India,” said Tejas Desai, partner at EY India.

Singapore’s highest tax bracket, for instance, is 22 per cent for those earning SG$320,000 (about Rs 1.6 crore) and above, per annum. The country’s tax differential with India will now widen to more than 20 per cent if one considers the surcharge impact for those earning more than Rs 5 crore and a tax rate of 42.74 per cent. 
 

"There's always a breaking point to something and we are reaching that point in terms of taxation," said a tax consultant on the condition of anonymity. "Fund managers will be a lot more reluctant to work from India now." 

The government has raised the surcharge levied on applicable income to 25 per cent for those with taxable income of Rs 2-5 crore, and to 37 per cent for those earning above Rs 5 crore. The effective tax rates for these brackets increases to 39 per cent and 42.74 per cent, respectively.