Foreign funds at IFSCs may get benign tax treatment under VCC model

K P Krishnan committee report has made multiple suggestions for Indian VCC vehicles to compete with Singapore

The regulator is making attempts to ease potential tax issues for foreign funds at international financial services centres, based on proposals for a new vehicle for funds setting up there.

The report from a committee headed by former bureaucrat KP Krishnan, deals with the introduction of variable capital company (VCC) structures in India. Similar structures are popular in international financial centres elsewhere, especially Singapore. India has been attempting to create an offshore jurisdiction on Indian soil to compete with such financial centres. The government has set one up at the Gujarat International Finance Tec-city (‘GIFT city’).  

The regulator for such jurisdictions is the International Financial Services Centres Authority. It recently put up the committee report in the public domain. The report noted that there could be legal and commercial reasons for consolidation. This may involve sub-funds within a VCC, or sub-funds belonging to different VCCs.    

“The merger and acquisitions of VCCs/sub-funds should be tax neutral irrespective of whether it is within the same VCC or between two separate VCCs,” said the report.

The committee has also suggested that sub-funds should have a framework to ensure they can avail of benefits under existing tax treaties. The Singapore regime issues tax residency certificates (TRC) or certificates of residency in the name of the umbrella fund, with the sub-fund name included. This can create issues with regard to claiming benefits under the tax treaty for sub-fund investments.

“The Indian tax authorities should issue a TRC at the sub-fund level to make it easy for them to claim the treaty benefits. The applications for TRC should be online and the electronic copy of the TRC should be available on the tax portal for anyone to verify the authenticity of the certificates issued,” said the report.  

A standalone VCC should also be able to get a similar certificate just like a sub-fund, the report added.

The report made recommendations on other aspects. This included issues related to incorporation, payment of dividends, financial statements, mergers, amalgamations, as well as means to encourage foreign funds to migrate to India’s International 

It suggested that VCCs can be set up to allow easy entry, redemption and buy-back of securities. The assets of one sub-fund should not be used to discharge the liabilities of the parent vehicle or other sub-funds. Financial statements for each sub-fund should be maintained separately.

Mergers and amalgamations should be allowed subject to the majority of the sub-funds’ investors agreeing to the exercise. The committee also recommended a separate law to govern such VCC structures as they are a new kind of vehicle.

The move to introduce VCCs in GIFT city comes even as Singapore’s India equity investments have neared nearly three trillion rupees (see chart 1). It also has more than a trillion invested through debt and hybrid instruments.

Interestingly, the share of Singapore has been dropping as a proportion of total equity investments. It was 8.2 per cent of total foreign portfolio investors’ equity assets under custody in December 2016. It is 6.4 per cent as of May 2021.