Important amendments to the IT act as a part of the Taxation & Other amendments law 2020 for FPI’s

Sep 28, 2020

The impact of this amendment is that it puts GIFT IFSC funds on par with Mauritius and Singapore based funds, as far as Cat III funds are concerned. To explain it better, Mauritius and Singapore funds had an advantage, where capital gains from sale of derivatives, which accounts for more than 80% of FPI trades were not taxable in those jurisdictions. As a result of the above amendments, derivatives, debenture interest and missed call investments (where the investments are out of India and investors are non residents), enjoy exempted capital gains income in India. Missed call investments, already enjoy complete exemption from all incomes under sec 115UB. The new primary amendment to Sec 10(4D) in a summary form will look like this.

Sec 10(4d) - Exemption of certain Income from total income for GIFT IFSC funds

Under Sec 10(4d), the following incomes or transfers or capital gains from securities (other than shares of Indian companies), do not form a part of total income; Such incomes/gains need to be generated by

  • The fund is domiciled in an Indian IFSC like GIFT and need not beenlisted in an IFSC. Such funds can be Indian Trusts, partnerships or companies under Indian laws
  • Securities dealt in are derivatives, bonds, debentures, other than shares of Indian companies
  • Underlying portfolio/investments are listed in IFSC stock exchange in India or any other exchange in India
  • The investors in the fund are non residents other than the sponsor and the manager; the capital has been subscribed in convertible foriegn exchange
  • To mean, that, income from foriegn companies /trusts/ Issuers of securities (equity/debt/derivatives/notes) that have no India sourced income connected to India do not form a part of total income
  • Income from securitisations trust, whose main business is securitisation operations

Further as a result of amendment in section 10(23FBC), the income and capital gains both accruing from or arising from a transfer of units of a GIFT IFSC fund, shall be exempted from addition to the total income. To top it, the T&OL Bill proposes to amend the Finance Act, 2020 to clarify regarding capping of surcharge at 15% on dividend.

With the above exemption, under 10(4D), Category III funds have been put on an equal footing with Mauritius and Singapore funds.

The debate around doing away with PAN number and the return itself, is perhaps the next reform for a Category III fund. Withholding is perhaps an easier option using the provisions of DTAA, than filings. The CBDT and Ministry of finance may also examine the need to have MAT under sec 115JB, exempted for IFSC funds. The rationale for this change is that there is hardly a divergence between book and tax books for funds. It improves ease of doing business, since one can hardly capture additional taxes from a fund under 115JB from a fund. It will also put IFSC at parity with Mauritius & Singapore funds in this aspect.

As they say ”May the best domicile prosper that is efficient and adds value”.