Permanent Account Number (PAN) of the Indian Income Tax Act, not needed anymore for certain investor classes

New Exemptions

On August 10, 2020, the Central Board of Direct Taxes (CBDT) in India, issued a note which has the effect of significantly easing the business procedures for certain classes of investors coming in via funds domiciled in Gujarat International Fin-Tech (GIFT) City, India’s first offshore financial destination. I would expect this to force the thinking of many managers to domicile in India vs Mauritius or Singapore, where vibrant skills and ease of operations is the rationale.

On the face of it, the amendment appears to be simple and has resulted in routine changes to the Indian Income Tax Act. A careful reading of the amendments suggests that this supposedly simple amendment could have many ramifications.

The insertion of new clauses has been made in rule 37BA (3) and also in 114AAB read along with Sections 139 and 206AA of the Act. Simply put, it exempts non resident Individuals, partnerships and trusts (investing through a GIFT IFSC Category I and Category II fund), from having to apply for a PAN number, provided they furnish certain primary information about themselves, from their home country. It does not, however, exempt a foreign corporate from applying for a PAN for the right reasons, one of which could be that a corporate investor in a GIFT fund, domiciled in certain jurisdictions may have opaque shareholder disclosure norms. This will hinder Ultimate Beneficial Ownership identification which in turn could lead to unanswered or unanswerable questions, abuse of international financial policies and open to itself to charges of money laundering. This is in consonance with existing rule 37 BA (1&2).

The need to file a PAN has been a source of irritation for non resident investors for many years. Investors feared that applying for PAN will lead to more than normal levels of scrutiny, although this fear was generally unfounded. This was brought to the attention of CBDT by the Industry, GIFT authorities, Practitioners etc. As a first step, an exemption from filing returns for investors coming through GIFT IFSC was put in place, assuming tax was withheld. Thus, exemption from PAN was the next logical step and it is to the credit of the GIFT authorities/CBDT that they have moved progressively in this regard.

What are the implications of this step in the right direction?

  • It levels the preference between managers choosing other offshore destinations for Category 1 and 2 AIFs viz a viz GIFT IFSC
  • No PAN means no Returns filing for the investor
  • Tax will simply be deducted at reduced rates, as if one had a PAN (Sec 206AA). Thus, a simple withholding tax in line with DTAA based on the information from the country of Investors origin, will be enough to claim the normal withholding rates
  • It also raises certain clarificatory questions pertaining to form 64. Does one need to add information about the exempted category in F64? Perhaps it will be revised, to include the Tax ID of the Investor in the home country
  • Although PAN is now much simpler to obtain, it does remove an irritant if not needed
  • The above exemption is better than IRS rules in the US, for non resident investors. For all practical purposes, a TIN or EIN number is required to claim treaty benefits and reduced withholding rates. There are exceptions for marketable securities and few others whereby filling up W8-BEN, a non resident can be exempted from procuring a TIN or EIN number and does not need to file returns in turn in the US. This puts us on a better plane on ease of doing business. It also sends a signal to the world financial markets that Indian regulations are similar to what they can expect in advanced international financial destinations
  • It could well spur Non-Resident Investors preferring GIFT fund over offshore fund jurisdictions, since irritation of PAN application has been removed. This to me is a key offset.

Last but not the least, I can see that we are well underway for pass through status for category III funds and other benefits extended to Category I and II, including exemption from PAN. This will truly give GIFT IFSC funds a level playing field versus the other offshore funds investing into India. "It will spur price discovery here", as PM Modi said.

Further, GIFT IFSC will provide employment here to our people, save us at least US $50 billion a year for fees we pay abroad and bring back our skilled finance professionals back home. In other words, this is a Vande Bharat Mission of another kind.

GIFT IFSC planned as a modern green campus of 800 acres with all kinds of facilities to work, study, play, invest, entertain and shop in the near future, will be a truly a torchbearer of things to come. Most of it is already done.

At Basiz, we saw this coming and have already set up the first fund administration unit in GIFT which has been functioning with its dedicated Gujarat based team from January 2019

Jai Hind!

CA. Aditya Sesh