Industry players are hopeful that some of the onerous conditions prescribed under section 9A of the income tax Act will be simplified in the upcoming Union Budget.
A ‘safe harbour’ regime for onshore management of offshore funds, by way of section 9A, was introduced in the I-T Act in 2015 to encourage the fund management activities of offshore funds from India. According to these norms, the presence of a fund manager or an investment adviser in India would not constitute business connection, permanent establishment or a tax residence for the offshore funds in India, subject to fulfilment of 17 prescribed conditions.
“While conditions have been designed to qualify only funds which have a broad investor base and prevent round-tripping and money laundering, they have become very straight-jacketed and at the same time open to varied legal interpretation,” Vishwas Panjiar, partner, Nangia Andersen, said.
One of the conditions states that the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India should not exceed 5% of the corpus of the fund. It is difficult to monitor indirect participation of persons resident in India, especially on a continuous basis. Given that KYC requirements under the Sebi FPI regulations 2019 have a threshold for identification of beneficial owners, there is a relative disadvantage on marketability of FPIs availing the safe harbour regime vis-a-vis those not availing it.
Current norms mandate that a fund-availing section 9A has to have a minimum corpus of `100 crore within the first year of starting operations. Industry players want this time frame to be increased to three or five years.
An eligible investment fund manager, along with his connected persons, is not entitled to more than 20% of the profits accruing or arising from the eligible investment fund from the transactions carried out by the fund through the fund manager. Experts believe this cap should be done away with as there are challenges in applying it in certain situations. This could be post redemption, when the overall gain has turned into losses for the fund at the financial year end or if the period for calculating performance profits is not aligned with the financial year or for multi-share class vehicles.
“The conditions on the structure, investor composition, investment activity and the fund manager’s activity and remuneration are incoherent with the intrinsic structure of offshore funds and the nature of FPI inflows into India. At the same time, a suitable carve-out needs to be provided for activities such as outsourcing a part of the back office and support functions of the fund manager which includes fund administration and fund accounting to an Indian outsourcing entity, which may be a group entity of the fund manager,” Panjiar said.
Funds that fall under category II FPIs which are appropriately regulated but not eligible for registration as category I FPIs are required to satisfy diversification conditions, which are onerous. The industry wants these funds to be exempted from meeting these conditions, which will benefit regulated broad-based funds domiciled in non-FATF member countries.
The definition of ‘connected persons’, taken from section 102(4) of the income tax Act, 1961, is subjective and difficult to satisfy.
“There is a case to lighten the rigour of the conditions for fund managers based in GIFT IFSC. A fund manager today in Singapore managing an India-focussed fund doesn’t need to comply with 9A conditions. Following a pari passu approach, to encourage the development of IFSC and asset management in India, some of the conditions of section 9A could be relaxed,” Tushar Sachade, partner, PwC India, said.
“There is a need to raise the threshold of resident individual investment from 5% to 10% under section 9A. Increased domestic participation would help in building the trust factor among offshore investors, making investment in IFSCs more lucrative and at the same time may provide opportunities to onshore investors to go offshore through India-managed funds,” Sandeep Sehgal, partner – tax at AKM Global, said.
Several offshore fund managers of Indian origin, who manage the India units of their global portfolios, have been keen to shift to the country as it will enable them to locally connect with bankers, analysts, institutional investors, as well as the company’s management.