Publicly pooled offshore funds could soon get a respite from the recent budget announcement to tax indirect transfers of category II Foreign Portfolio Investors (FPIs), said two people privy to the development. The move will benefit nearly 2,000 FPIs who put together own 15-20 per cent of FPI assets in the country.
The Budget proposal aimed to impose additional capital gains tax on investors and unit holders of category II FPIs. However, several big ticket funds based out of Mauritius reached out to the government, saying they weren’t eligible for category I licenses since they were based out of non-FATF jurisdictions and the new tax will take their effective capital gains tax rate to 40 per cent.
There were also concerns that the law had retrospective effect since it was brought into force from September 23,2019, even though the announcement was made on February 1,2020. And providing such exemption to publicly pooled funds would be encouraging for the industry.
“This should provide comfort and assurance to the investors in FPIs,”
Indirect share transfer provisions apply to funds that have deployed more than 50 per cent of their portfolio investments in India. The rules say that transfer of shares or units of such funds even outside India will be subject to capital gains tax domestically. For instance, if an investor in an offshore fund that qualifies under the provisions sells the units to some other investor, the transaction will attract 10 per cent capital gains tax if the shares or units were held for 12 months.
However, if held for less than a year, the units could attract tax in the range of 30-40 per cent of the net capital gains.
“The government has asked industry participants to suggest ways to exempt the genuine funds from the provisions,” said a person who is advising the government on the process. “The idea is to exempt appropriately regulated funds from the ambit of the tax. Family trusts, corporates and individual investors may continue to be subjected to the indirect transfer taxes.”
The law was originally introduced in 2016 to tax the sale of Indian assets that happens outside the country. Back then, Sebi’s FPI regime came with three categories, of which category I included pension and sovereign funds and category II broadbased and regulated funds. Category III comprised other kinds of FPIs such as family trusts and corporate bodies.
