Mumbai, November 8, 2017

The government could consider relaxing the permanent establishment rules to attract fund managers who manage global investment funds to operate out of India, said two people with knowledge of the matter.

India, in 2015, had introduced a special tax regime for offshore fund managers. The government had then said that an offshore fund would not be exposed to Indian tax on its global income just because its fund manager was located in India. In other words, taxation would not be dependent on where the fund manager was sitting -Mumbai, Hong Kong or Singapore. However, the government had put some conditions which the fund managers and foreign investors were required to abide by. Later, in 2016, the Central Board of Direct Taxes (CBDT) announced some leeway for such funds. However, most funds have still stayed away from moving to India, blaming local conditions that they termed as tough.

The government, said the people, recently reached out to global funds, seeking their reason to stay away from India. “It appears the government may be making some leeway for category 1 and 2 funds,“ said one of the people.

The issues cited by funds include the requirement to reveal the names of all investors and to make sure that Indian investors don't have more than 5% of the total money held by the funds.Many big funds have claimed that while they can provide details of direct investors -which are often other funds -they have no visibility of indirect investors.

“Typically, funds could have investors comprising global asset managers operating a fund of funds strategy or regulated and discretionary wealth managers allocating a part of the wealth managed by them on behalf of their clients. Asking the eligible funds to confirm indirect participation of resident Indians in such cases is practically impossible; the requirements ought to be limited to direct participants lion investment in the funds,“ said Sameer Gupta, leader financial services, tax and regulatory at consultancy firm EY India.

The intention to put such a condition was tripping. However, tax to curb round-tripping. However, tax experts said those fund managers sitting in India should have an equal ground with those outside.

“There are some issues under Section 9(A) (Income Tax Act) which are keeping foreign funds from setting up base in India. The demand has been to relax the norms around the number of employees that the fund has to maintain in India and relax certain other norms around taxation of FPIs (foreign portfolio investors) in India,“ said Amit Singhania, partner-tax at law firm Shardul Amarchand Mangaldas & Co.

The government may be considering offering some flexibility around transfer-pricing provisions, said tax experts. The problem now is that a fund may have tax implication if its manager is found to be charging more than 5% lower or higher than the average fee charged by others. Foreign funds are demanding that the onus here must only be on the fund manager and the funds must be ring-fenced.

“Since the fund and the fund manager are in any case deemed to be associated enterprises, the fee arrangements will be subject to the transfer pricing provisions.

[The Economic Times]