Managing off-shore funds

Why in news?

Central Board of Direct Taxes (CBDT) has recently notified the revised rules for a safe harbour regime.

What is the background?

• The government and CBDT have taken steps in the past for making India a tax-certain jurisdiction and creating a positive business climate.
• 'Safe harbour' regime is one such area of the direct tax laws that is concerned with management of offshore funds.
• Safe harbour provisions were introduced under the Income-tax Act, 1961  by the Finance Act, 2015.

What are the drawbacks?

• Too many eligibility conditions relating to annual reporting requirements, investor diversification and tax residence are cumbersome to adhere to.
• Another key reason for the local management of off shore funds not happening is the Indian tax regime.
• There are investment diversification conditions like not allowing more than 26 per cent stake in underlying entities, etc.
• The private equity industry is thus largely not expected to benefit from provisions of the safe harbour rules.
• Given huge FPIs in Indian capital markets with some registered with SEBI, a need arises for managing these from within India than from abroad.

What are the recent changes?

• To further simplify the safe harbour regime, certain relaxations are now introduced.
• Application of certain investor diversification rules are relaxed for certain categories of Foreign Portfolio Investors (FPI)( Category I & II).
• There was a requirement for funds wanting to avail safe harbour to qualify as a tax resident of overseas jurisdictions.
• This condition proved to be a hurdle for funds in certain countries given the local taxation regimes.
• To address this, the residency criteria for investors has been relaxed by notifying 121 countries/specified territories.
• Now, an offshore fund can invest from these countries without it qualifying as a tax resident of that overseas country/specified territory.
• It has introduced mechanism to seek pre-approval for setting up fund management activities in India.
• Also, the earlier condition on relationship that the fund and the fund manager should not be “connected persons” is done away with.

What are the potential benefits?

• Local management of off-shore funds can lead to more participants, increased volumes, employment opportunities and buoyancy in tax revenues.
• It could make a positive impact on India’s forex position.
• Also, FP Investor being regarded as a tax resident of India can further lead to global income of the FPI being potentially taxable in India.
• It will benefit fund managers in India who can now approach Category-I and Category-II FPIs for management of their India assets.
• This include the domestic mutual fund houses, portfolio management service (PMS) and alternative investment fund (AIF) asset managers.
• The provisions are said to be the Make- in-India equivalent for the fund management industry.

Source: Business Standard