The unintended impact of the amendment in Finance Bill 2019- Super rich tax on FPIs & Investment Trusts.
- The surcharge on the super rich has an unintended consequence on Funds as Trusts/ FPI, investing into India.
- This can be overcome by structuring a fund as a LLP/Company with certain relief by MCA or the Government amending the finance bill or an ordinance.
At the outset the intent, perhaps behind the announcement in the budget, is to increase revenues. This is sought to be done through an increase in surcharge from 39% to 42.74 % at various slabs.
This move, however, has a huge impact on FPIs and Investment trusts in India. The majority of the 450 odd AIFs in India are structured as trusts. FPIs too follow suit and structure their investments in India as trusts where necessitated. The major reason behind this structuring is the fact that trusts are a better alternative to LLPs or companies, given the deep disclosures that LLPs/Companies are required to make and the restrictions that arise from the compliance requirements of Companies Law.
Under the Indian Direct Tax regulations, a trust is classified as an AOP (Association of Persons) and thus by implication, attracts the surcharge envisaged in the Finance Bill 2019. Currently, Category I and Category II AIFs structured as trusts are pass through entities for tax purposes. However with the surcharge increase, the taxes have gone up at Investor level, even with pass through. Post announcement of the Budget on July 5th 2019 and concerns raised by key players in the capital markets, the government is holding discussions with industry leaders. It is figuring solutions to provide some relief, so as to ensure that investments into India aren’t hampered. The Finance Minister has made it amply clear that the issue will be heard and investment climate is bettered.
From the perspective of the FPIs/Investment trusts there are broadly two solutions that can be implemented.
- The first is in the hands of the fund manager. One could structure the investment vehicle as a LLP or a Company. This perhaps seems to be the long term goal for greater transparency( as is the global trend). This solution will however require details of all the investors to be disclosed under the current Companies Act. The MCA may going forward consider removal of this requirement for SEBI regulated AIFs/FPIs as the names and details of the investors are already known to the Registrar of Companies and SEBI . Additionally it is not clear from the Companies Act, if there can be underlying funds setup as schemes to use the same pooling vehicle under the current companies act. This might have to be setup as subsidiaries or step down partnerships or Segregated Portfolio Company. This is an MCA/SEBI route. It will also bring parity between Vehicles.
- Alternatively there seems to be two routes which can be adopted by the government. The government can either pass an amendment in the bill to be passed in both houses of parliament to change the rate of surcharge across the board or bring in an ordinance to amend the acts in the finance bill. Very simply, it may also legislate that the SEBI regulated or registered or passported investment vehicles are exempted from the definition of AOP for the purposes of Income tax as far the surcharge is concerned. It needs to be a very specific proviso such that AOP category, should not harm pass through status.
With global investment hubs facing crisis of costs, taxes and increasing disclosures, it will be good if the government and regulator address the issue at the earliest, to ensure India places itself as an alternate investment hub. The redressal of this issue is also vital to convert the traction, that the pet project of PM Modi-GIFT city is generating, into investments. The budget brought along a lot of positives for GIFT city and with the issue of super rich tax on FPIs/Investment trusts hopefully being resolved, GIFT shall be India’s foremost asset in terms of placing herself as the next Big global investment hub.
While the jury is still out and various experts are still split on the solutions, there seems to be a consensus that one of the above solutions shall be implemented by the government.
In summary, if the broader picture is to be looked at, the benefits of a trust must be accorded to a LLP or Ltd company for SEBI regulated investment vehicles, as it will promote greater transparency, in line with global trend and at the same time make India more popular as an Investment hub. Time will of course tell.