As a part of the Taxation and Other Laws Bill tabled in the Parliament, the Government has proposed to introduce a new regime for taxation of off-shore funds choosing Gift City. As per the proposed changes, profits and business income earned by such funds from Gift City will be tax exempt. Tax experts say, the changes are comparable to taxation of foreign funds domiciled in Fund jurisdictions such as Singapore and Ireland.
Currently, funds coming from Singapore and Mauritius don’t pay any taxes on derivative trades. However, in the recent past the tax department has gone after some of such FPIs – especially those based out of Mauritius – from tax avoidance point of view. This has prompted several foreign funds to look at creating a domestic structure so that they comply with tax avoidance laws like General Anti-Avoidance Rules (GAAR). However, to do that they will have to forgo the tax exemption on derivatives that they enjoy under Mauritius and Singapore tax agreements.
Going forward, such funds can set up an Alternative Investment Fund (AIF) in Gift City and invest in contracts traded on NSE and BSE without having to forgo the tax incentive. At the same time, these funds needn’t worry about the tax avoidance angle if they are based out of Gift City, since there will be no need to apply for tax treaty exemptions.
“Funds set up in IFSC were at a comparative disadvantage compared to funds from treaty jurisdiction since those Funds could claim tax exemption on F&O (Futures and Options) gains, debt securities as well as upside income from securitization trust. This change puts Cat III AIF from IFSC at par with those offshore funds” – Tushar Sachade, Partner, PWC.
Any foreign fund investing in India has an option in terms of where they want to pay taxes. Either they can pay tax to the Indian authorities or they can pay tax in the jurisdiction where they are based out of – like Singapore or Mauritius. However, if they opt to pay taxes in their home jurisdiction and not India, they will have to fulfil various requirements under various tax laws. Most importantly, the fund should not choose a jurisdiction purely based on lower tax rates.
For instance, a foreign fund cannot choose Singapore or Mauritius as a gateway into India just because the tax treaties between India and these countries offer a lower tax rate. The onus is on the funds to prove that they genuinely have a business in Singapore or Mauritius.
Apart from GAAR, the multilateral Agreements (MLIs) introduced by the Organisation for Economic Co-operation and Development (OECD) also curb such tax avoidance practices. India along with over 50 other countries is a signatory to the agreement.
The FPIs have more reasons to cheer the bill tabled in the Lok Sabha on Friday. The government has also proposed to reduce surcharge on dividends applicable to foreign funds structured as trusts.
Until March 31, 2020, Indian companies paying dividends were subject to Dividend Distribution Tax (DDT) at a rate of 20.5%. Shareholders were not required to pay any more taxes on such dividends. However, in The Union Budget the government shifted the tax liability on dividends into the hands of investors. Further, dividend income earned by FPIs was subject to a 37% surcharge that took effective dividend tax rates to nearly 29% (20% dividend tax plus surcharge). However, now the government has capped the surcharge at 15%.
“This is a welcome step proposed by the Government which if implemented will be effective from 01 April 2020. The tax rate on dividends will significantly come down to 23.92% as against 28.5%,” said Suresh Swamy, partner, PWC. “Excess taxes paid by the FPIs until the enactment of bill can be adjusted against their capital gains tax liability in India”
The government has also proposed to ease the withholding tax regime on dividends for FPIs, add tax experts.