Govt to address PE/VC concerns over permanent establishment norms soon
Jayant Sinha said that we will make sure all investors get a safe harbour with respect to permanent establishment
New Delhi: The government will soon set rules so that private equity and venture capital investors can shift base to India without any adverse tax consequences, junior finance minister Jayant Sinha said on Wednesday.
“We are in the process of receiving inputs from industry and then we will issue a circular. We will make sure that all investors get a safe harbour with respect to permanent establishment,” Sinha said at a conference organized by Indian Private Equity and Venture Capital Association, a lobby group. “So investors should feel reassured that as a policy objective, we will make sure that if you as an investment manager based in India are managing offshore funds, your tax incidence in respect to these funds is going to be zero.”
“We want to make sure that people who are managing funds in Singapore, Dubai or London are here in India,” the minister said. “We want to make sure that the tax and regulatory regime is the best in the world.”
The government will modify permanent establishment norms to make it attractive for offshore fund managers to operate from India, finance minister Arun Jaitley had said in his 2015 budget speech.
“The present taxation structure has an inbuilt incentive for fund managers to operate from offshore locations. To encourage such offshore fund managers to relocate to India, I propose to modify the permanent establishment norms to the effect that mere presence of a fund manager in India would not constitute permanent establishment of the offshore fund, resulting in adverse tax consequences,” he had said.
In response, the private equity and venture capital industry had flagged concerns over some of the stipulations for application of the tax advantage. They had pointed out that the requirement of at least 25 investors in a fund was not feasible and should be lowered. They had also opposed the clause that no single investor in a fund can invest more than 10% of the total corpus, thereby ruling out large investors like pension funds.
Sinha explained that while moving amendments to the Finance Bill, 2015, the government had given itself powers to notify more funds that will be exempted from permanent establishment norms. He added that the initial norms were for investors in listed companies like mutual funds and the government is aware of the concerns expressed by private equity and venture capital investors and will strive to address them.
In a report released on Wednesday, consulting firm McKinsey and Co. said an enabling regulatory framework is needed to ensure the continued growth of the private equity industry. The budget had made a good beginning but there are still issues to be addressed, the report said.
“First, mobilizing greater domestic institutional capital for private equity will require existing allocation ceilings to be shifted for certain types of investors. Second, it will be critical to create an enabling environment for overseas investors by removing practical impediments related to withholding taxes and safe harbour norms for advisors to overseas investors,” the report said. “Third, simplifying delisting norms for closely held companies and defining a robust court receivership process will expand the investible universe available for investors. And last, providing a more certain and robust securities and tax regime will help private equity investors exit in a timely manner.”
The private equity industry is estimated to have invested $103 billion in India between 2001 to 2014.
