Tax benefit: SEBI seeks modification in Budget proposals for offshore funds

NEW DELHI, MARCH 16:
Market regulator SEBI has suggested certain changes to the conditions stipulated in the Finance Bill for extending beneficial tax treatment to offshore funds investing in India.

To encourage fund managers of offshore funds to locate themselves in India, Finance Minister Arun Jaitley had in his recent Budget proposed a beneficial tax regime for offshore funds and their fund managers so long as they met certain conditions. While offshore funds had to fulfil 13 conditions, the fund manager had to conform to four conditions so as not to be considered as “tax resident in India” and avoid facing adverse tax consequences.

In its post-Budget suggestions, SEBI is now learnt to have made a case for modifying certain conditions besides dropping a stipulation that the offshore fund should be resident of a country or territory with which India has a Double Tax Avoidance Agreement or Tax Information Exchange Agreement.

Alignment of conditions

SEBI has also sought alignment of the broad-basing condition with those prescribed by the market regulator for foreign portfolio investors (FPI), sources close to the developments said.

For an FPI to be registered with SEBI, it should have minimum of 20 members and no member should have participating interest in excess of 49 per cent.

The Finance Bill 2015, however, stipulates that an offshore fund should have minimum 25 members and no member should have participating interest in excess of 10 per cent. SEBI now wants to align the two conditions, in favour of the one for FPI.

Fund management industry experts contend that there has been no application of mind by Indian tax authorities while framing the conditions for granting beneficial tax regime.

“The broad-based conditions specified in the Finance Bill will make it restrictive for private equity players in availing this beneficial tax regime,” Siddharth Shah, Partner — Corporate and Funds, Khaitan & Co, a law firm, told BusinessLine. It was tax reasons that prompted several private equity fund managers to shift their base out of India to Singapore in the last three years and the proposed beneficial tax regime — if such conditions persist — will not benefit many private equity players (who have just three to four large investors in such funds), Shah said.

The Budget conditions — if aligned with SEBI’s FPI norms — will be designed for more public market investing of money and not conducive for private equity funds.