Govt. clarifies rules on tax treatment of offshore funds
The government said a foreign hedge fund with an Indian fund manager working in India will neither be classified as having a business connection in India nor as being located in India.
“Under this regime, the fund management activity carried out through an eligible fund manager in India by an eligible investment fund does not constitute business connection in India of the fund and also does not lead to the residence of the fund in India,” according to a government notification on Wednesday. “This was a big issue for private equity where the Indian counterparts were considered a part of the global company,” Girish Vanvari, Co-Head of Tax at KPMG told The Hindu. “This will encourage fund managers to be resident in India.”
Among the various other changes made, one of the most significant is that “where the investment in the fund has been made directly by an institutional entity, the number of members and the participation interest in the fund shall be determined by looking through the said entity”. “This is partly okay. The requirement of having 25 investors has been liberalised. The safe harbour period has been provided for fulfilling various limits for getting the exemption,” Mr. Vanvari said.
However, the steps taken by the government are still incomplete, according to him.
“The two big issues which are not addressed is that no single investor can invest more than 10 per cent in the fund and that the aggregate participation of 10 or less members has to be less than 50 per cent,” Mr. Vanvari explained. In other words, 10 people cannot own more than 50 per cent of the company. “It has been clarified that the fund will not be able to own more than 26 per cent in an Indian entity to avail of the exemption,” according to a KPMG statement.
“However, it does not address two important issues, i.e. a single investor cannot own more than 10 per cent in the fund and 10 or less investors should own 50 per cent or less.”
