Impact Comments of CA.Aditya Sesh, MD, Basiz Fund Services

Analysed & Curated by Dr. Viswanath Krishnan, Director, Basiz Fund Services

Feb 01, 2021

Budget Booster for the Investment Industry 2020-21

Impact on the Fund Industry, Direct & Collateral - Key Highlights

Summary Impression

While one has to read the proposals in detail, it is good that the Government of India is continuing to further and support the development of a world-class Fintech hub at GIFT IFSC. The intention is a long term one, that of making India as a Financial Services Center, that can bring in revenue and employment. This is a long term vision of our Honorable PM. To that end, such reforms and tax incentives are a means to the end; the end being efficiency in investing and attracting capital in a growing economy that has delivered an ALPHA that is critical in mass and sustainable and shall do so for the next few decades.

Tax Proposals

Re-domiciliation of Offshore funds

  • Transfer of capital asset by an Offshore Fund (original fund) to a Resultant Fund upon re-domiciliation to an IFSC, before 31 March 2023 will as transfer. This could clearly spur some fund managers specially those who have completed their investment phase to consider a shift of base to avail the benefits of lower costs, get away from the need to get a Tax Residency Certificate in another domicile, compliance of GAAR & domicile in the region of operations. The need for proving tax substance is therefore now unnecessary. Further with tax benefits being the same as other geographies and costs of operations lower, I would expect Indian Fund Managers to now shift funds, this being a big benefit.
  • For non-residents, capital gains exemption on account of treaty benefits for investments - to be continued under the domestic tax law. Thisis a good continuation and will lead to certainty, although the details are to be seen.

Video based Appellate E-ITAT

This move is in the direction of the general trend of this administration to improve ease of doing business by digitising the courts in collaboration with the Judiciary, which happened through virtual hearings during the Pandemic. It is also in continuation of Vivadh Se Vishwas ( reducing tax litigations through settlements). While assessments have largely become faceless, this appellate process going virtual improves ease of doing business in a new IFSC like GIFT as well as for Onshore India Investments.

Dividend Income

  • Advance Tax Liability on dividend income shall arise only after the declaration/ payment of dividend/ interest. This has been a bug bear, especially when dividend has just been declared and not paid. This now makes sure that you pay only when you receive it
  • Dividend paid to Real Estate Infrastructure Trusts and Infrastructure Investment Trusts shall be exempt from TDS thus improving the IRR of the investor
  • Deduction of tax on incomes including dividend income of Foreign Portfolio Investors at treaty rate. Some treaty rates are lower and this should reduce the withholding and improve the IRR for managers who are paid based on IRR
  • For Foreign companies, dividend income to be exempted from MAT if applicable tax rate is less than MAT rate; this is a very welcome change for those operating companies that operate in the domestic onshore zone, who pay dividends to their holdcos. However, one needs to read the fine print on whether it applies to fund vehicles too.

Sovereign Wealth Funds and Pension Funds

Relaxation in conditions for exemption to Sovereign Wealth Funds and Pension Funds investing in Indian infrastructure in the areas of prohibition on loans or borrowings, restriction on commercial activities, direct investment in entity owning infrastructure etc. The intention here is good to attract large chunks of money into multi governmental infrastructure projects.

IFSC Banking Units

Special tax regime for IBUs making public market investments in India – at par with Cat III AIFs in IFSC. This will certainly motivate IBU to act as custodians and encourage them to offer fund management services either through themselves or with others in the ecosystem. In IFSC, this is a possibility given that it is an Omnibus regulator.

Aircraft Leasing & Financing units in IFSC

  • Any income by way of lease rental paid to foreign enterprises has been exempt. This is perhaps the best way to promote aviation leasing in India. What is royalty on lease rentals needs clarification and perhaps the Budget details it.
  • Gains on disposal/ sale of aircraft exempt under section 80LA. Very wise move, basically it is a tax holiday for 10 years of the 15 Years from a IFSC perspective.

Consolidation of all major acts pertaining to Securities

This is a very important move from a perspective of “Ease of Operations”. Multiple legislations on the same matter may conflict with each other, cause multiple similar compliance requirements and this consolidation certainly helps. An act as wide as SEBI Act, 1992 probably will now include other acts like Depositories Act, 1996, SCRA, 1956 and Government Securities Act, 2007, into a rationalised single securities market code and perhaps be a SEBI 2.0. SEBI has been notified as the regulator for regulating gold exchanges in India. This increases the footprint of SEBI and brings this commodity into its fold as it is an asset class like any other.

Others

  • Time limit for re-opening assessments is sought to be reduced to three years from the current six years. Reopening upto 10 years is to be allowed only if the undisclosed income is more than Rs. 50 lakhs in a year.
  • Section 80LA(1A) to be amended to units permitted or registered under IFSC Authority Act, 2019. Technically this enables IFSC units to claim 80LA(1A). This is more clarificatory in nature and puts to rest an existing doubt.
  • Powers assumed by the Central Govt to issue/ modify safe harbour regime conditions for IFSC units. This is to be read in detail to understand what it means.
  • Funding of infrastructure by issue of tax efficient Zero Coupon Bonds by notified Infrastructure Debt Funds.
  • Proposal to rationalise the provisions relating to taxation of the assets or amount received by partners from the partnership firm in excess of their capital contribution.
  • Setting up an Asset reconstruction Company and Asset management Company to take over and consolidate existing stressed debt, manage and dispose of the assets to AIF’s and other potential investors.