Industry players lobby for relaxation of offshore fund taxation rules

Industry players are lobbying for relaxation of rules under Section 9A of the Income Tax Act in the upcoming Budget.

Section 9A, introduced on April 1, 2016, exempts funds from getting taxed in India. Only a fund manager’s income or management fee will be subject to tax.

According to current norms, the total investment of a person resident in India, whether directly or indirectly, shall not be more than 5 per cent of the fund corpus. The percentage of resident money has to be specified by way of a declaration to the government as well.

“How do I know if the money I get in the fund is resident money or not, especially if a fund of fund or institution is putting the money? It is virtually impractical to get an investment declaration and/or investor names from them,” said Vaibhav Sanghavi, co-CEO, Avendus Capital Public Markets Alternate Strategies, which got the nod for a fund under Section 9A the previous year.

Current norms mandate that a fund-availing Section 9A has to have a minimum corpus of Rs 100 crore within the first year of starting operations. Industry players want this time frame to be increased to three to five years. 

“It is difficult for funds to garner Rs 100 crore within a year if they do not have an established track record overseas,” Sanghavi said.

Industry players want offshore funds such as FPIs to be allowed the benefit of safe harbour provisions without the need to satisfy conditions mentioned under Section 9A of the Act. They want the government to clarify that the relaxations provided under this Section to Category I and Category II FPIs, under the erstwhile FPI regulations, would be extended to the two categories under the new two-category regime.

Even after getting a nod, a fund has to wait till the next financial year to start operations, as per existing norms. This means that a fund getting an approval on December 1, 2019 can only start collecting money from April 1, 2020. Funds should be allowed to collect money immediately after getting the necessary approval, experts say. 

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. However, the rules have been onerous and only a few funds have been recently granted approvals under this regime.

The government has been giving concessions to make the shift practically feasible. In May this year, the Central Board of Direct Taxes 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 relaxed two minor conditions in the Budget last year.