The Union Budget has on the whole aimed to provide an easier tax regime for the stock market, in keeping with its announced intention to create and International Finance Centre (IFC) at Gujarat International Finance Tec-City (GIFT), which could “become as good an IFC as those in Singapore or Dubai”. Finance Minister Arun Jaitley moved on key tax provisions, including an exemption from minimum alternate tax (MAT) for foreign portfolio investors (FPI), relief on the general anti-avoidance rules (GAAR), and clarity on permanent establishment rules.
“The intent is generally good. All the demands have been heard, and changes have been made to laws. For example, earlier, GAAR was to apply to transactions from 2010. This has been changed to investments made after the new date of applicability in 2017,” says Rajesh H Gandhi, partner, Deloitte Haskins & Sells LLP..
“This Budget seems to be the voice of foreign investors, and shall be seen as a welcome move to boost foreign investments in India. It is clear the overarching theme of the Budget is making India an attractive and tax-friendly investment destination,” says Bijal Ajinkya, partner, Khaitan & Co.
|NON-TAX BOOST FOR THE MARKET|
MERGER OF FDI AND FPI CAPS
The MAT provisions were originally brought to ensure large domestic corporate entities did not escape the tax net because of various incentive schemes. The tax department earlier in the month sent notices to impose the same provision on the FPIs that had structured themselves as companies. This would have raised their long-term tax rate from zero to around 20 per cent, and affected foreign investors on a large scale. The finance minister clarified the tax was not applicable.
The government has also clarified the Permanent Establishment (PE) rules and attendant tax liabilities will not apply if a fund manager is located in India. This is expected to encourage more fund managers managing Indian assets to locate themselves within the country, say experts.
“The present taxation structure has an in-built incentive for fund managers to operate from offshore locations. To encourage such offshore fund managers to relocate to India, I propose to modify the PE norms to the effect that mere presence of a fund manager in India will not constitute PE of the offshore funds resulting in adverse tax consequences,” Jaitley said.
Though the overall tone is positive, some problems remain, including the onerous requirements to qualify for PE exemption and compliance issues related to the wording of application of MAT.
Regulations for a financial special economic zone (SEZ) are likely to be announced next month, according to the finance minister. The move is to create a place where international exchanges and foreign financial institutions are to enjoy tax benefits, and compete with other jurisdictions like Dubai and Singapore.
The government has proposed to amend the Income-Tax Act to allow for mutual fund schemes to merge without adverse tax implications. This is seen as a positive. However, the withdrawal of the service tax exemption for financial distributors is a negative. Also, there is an increase in surcharge on distribution of income through buyback, dividends and distribution of income by mutual funds and securitisation trusts, from 10 per cent to 12 per cent.
The private equity industry is expected to see a boost after Jaitley announced proposals like foreign investments in Alternative Investment Funds (AIFs) and tax ‘pass-through’ for AIFs. Rental income is given a pass-through status for Real Estate Investment Trusts (Reits). Tax clarity was also provided for Infrastructure Investment Trusts.
A pass-through status allows a fund to pass on the tax liability to the end-investor. At present, specific tax ‘pass-through’ is applicable only to AIF Category I — venture capital funds (VCFs) and the erstwhile VCFs. Other AIFs are taxed according to the trust taxation framework.
A little more than $80 billion worth of investments were made in Indian companies by private equity and venture capital firms over the past decade.
“This is a welcome Budget for the private equity industry, as it addresses the Permanent Establishment issue, a key pain point of the industry… Overall a positive Budget for private equity. This, together with the other measures promising predictability and non-aggressive tax regime, should see a significant growth in private equity investment in India,” says Harish HV, partner, Grant Thornton India LLP.
There are a little more than 200 active fund managers operating in India — 100 of them domestic ones. The industry claims over 12 per cent employment growth in companies back by private equity and venture capital firms, against three per cent employment growth in other companies. The industry had demanded encouraging insurers, the Employees Provident Fund Organisation, pension funds and charitable trusts to invest in AIFs. In India, regulations governing pension funds and charitable trust do not permit investment in AIFs.