Key tax and regulatory proposals relevant to Foreign Portfolio Investors.
The Finance Minister of India presented the Indian Union Budget 2021-22 on 01 February along with Finance Bill 2021. Through the Budget, the Government of India proposes several key tax and regulatory measures towards easing the business environment and to further boost foreign investments into India. A summary of key highlights of the Budget announcements relevant to Foreign Portfolio Investors (FPIs) are outlined below:
Single Securities Markets Code to be introduced integrating Securities and Exchange Board of India Act 1992, Depositories Act 1996, Securities Contracts (Regulation) Act 1956 and Government Securities Act 2006
Permanent Institutional Framework to be created to instill confidence amongst Corporate Bond market participants and enhance secondary market liquidity
In order to augment availability of finance for real estate and infrastructure sectors, FPI investment in debt securities issued by Infrastructure Investment Trust (InvITs) and Real Estate Investment Trust (REITs) to be enabled
Income in the nature of dividend, interest and long-term capital gains from investments in Indian companies engaged in the infrastructure sector earned by Sovereign Wealth Funds (SWFs)/ Pension Funds (PFs) is currently exempt from tax (subject to certain prescribed conditions). Modifications / relaxations proposed to the applicable conditions for availing tax exemption which inter-alia include:
Certain other aspects clarified such as SWFs/PFs permitted to invest in Alternative Investment Funds (AIFs), which in turn can invest up to 50% in non-eligible investments. Exemption in such case for SWFs/PFs shall be determined proportionate to the eligible investments only. SWFs/ PFs also permitted to invest through domestic holding company and investment in non-banking finance company-infrastructure debt fund/Infrastructure finance company permitted
Capital gains arising on account of transfer of capital asset from an offshore Fund relocated to a Fund established in the IFSC are exempt, provided that capital gains were not chargeable to tax if the relocation had not taken place.
Special tax regime for Banking Units in IFSC (IBUs) making public market investments in India introduced in line with Category III AIFs in IFSC. Tax regime inter-alia provides:
Exemption for capital gains on derivatives, debt and offshore securities
Reduced tax rate of 10% on dividends and interest
Exemption on income earned on transfer of Non-Deliverable Forward contracts by non-residents entered into with an IBU which commenced operations on or before the 31 March 2024 and fulfils prescribed conditions.
Certain relaxations are proposed in the safe harbour conditions for Fund Manager located in IFSC provided such Fund Manager commences operations prior to 31 March 2024.
Reduced timelines prescribed for filing of revised and belated tax return, processing of tax returns, issuance of notice for conduct of tax audit proceedings, issuance of notices for re-opening of assessments and completion of tax audit proceedings
Constitution of faceless Dispute Resolution Committee for small and medium taxpayers having:
returned income (in case where return is filed) up to INR 5 Mn (approx. USD 68,500) and
aggregate variations proposed in the specified order up to INR 1 Mn (approx. USD 13,700).
Current scheme of advance ruling proposed to be overhauled.
No levy of interest on deferment in payment of advance tax payable on dividend income if appropriate taxes are paid within the remaining due dates for payment of advance tax
Introduction of a definition for the term ‘liable to tax’
Notified Infrastructure Debt Fund to be permitted to issue Zero Coupon Bonds
Note that the above tax proposals will get enacted only after the Finance Bill is passed in the Parliament of India and receives the India President's assent. We will keep you posted on further developments.
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Anthony Leung Shing, ACA, CTA
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Tax Leader, PwC Mauritius
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