Draft legislation seeks to scrap minimum fund size and investor diversification requirements under safe harbour rules, allowing offshore funds to appoint India-based managers without triggering Indian tax liabilities.
India has proposed changes to its tax laws aimed at shielding offshore investment funds from Indian tax liabilities when they use fund managers based in the country, as the government looks to attract overseas capital and strengthen India as a fund management hub.
A draft bill proposes easing the existing safe harbour framework for offshore funds by removing requirements related to minimum fund size and investor diversification. The move could make it easier for global investment funds to appoint India-based managers without creating additional tax exposure.
The proposal comes at a time when India has been grappling with significant foreign portfolio outflows and is seeking to improve access and regulatory certainty for overseas investors. Foreign investors have previously raised concerns over the complexity of India’s tax rules and their administration.
The government said the changes were being proposed to promote fund management activity in India and provide greater tax certainty.
What changes under the proposed rules?
Under the existing framework, an offshore fund must meet several conditions to qualify for safe harbour protection from Indian taxation.
The fund is required to maintain a minimum corpus of Rs 1 billion, have at least 20 investors and ensure that no single investor contributes more than 25 per cent of its total corpus.
More from BusinessFunds that fail to satisfy these conditions can risk their India-sourced profits being taxed at rates of up to 38 per cent.
The proposed legislation seeks to remove the minimum corpus and investor diversification requirements. If approved by Parliament, offshore funds could use India-based investment managers regardless of their asset size or concentration of investors without automatically triggering a tax liability in India.
The changes could significantly reduce the risk of offshore funds being considered to have a “business connection” in India solely because their investment manager operates from the country.
Some safeguards will remain
The government has, however, retained certain restrictions under the proposed framework. Domestic investors will not be allowed to account for more than 5 per cent of an offshore fund’s assets if it wants to qualify for the exemption. The fund must also not control businesses in India to remain outside the country’s tax net under the safe harbour provisions.
The relaxation could provide a boost to India’s domestic fund management industry, as offshore funds have previously found it difficult to comply with the extensive conditions required when appointing managers based in India.
By simplifying the framework, the government is seeking to encourage more global funds to use Indian investment professionals while providing greater certainty over their tax exposure.
The proposal will need parliamentary approval before the revised rules can take effect.
