Last year, the Securities and Exchange Board of India (Sebi) had integrated three FPI
categories into two. The regulator also did away with the broad-based criteria altogether.
“It would have been better if the CBDT had harmonised the tax
law in section 9A with the new FPI
Regulations, by providing exemption from meeting the broad-based criteria in section 9A to both Category I & II FPIs. By requiring Category-II FPIs to meet the broad-based conditions in section 9A, the tax law limits the ability of Indian fund managers to manage even regulated funds set up in non-FATF member countries,” said Tejas Desai, partner at EY India.
“The safe harbour provisions are the equivalent of ‘Make in India’ for the asset management industry. The CBDT should have taken a cue from Sebi and extended the concession from investor diversification to both Category-I and Category-II FPIs,” added Sachade.
Aravind Srivatsan, partner at Nangia Andersen, believes the latest notification, along with the recent rules prescribing minimum remuneration to be earned by fund managers to enjoy the safe harbour exemption, provides clarity to fund managers for actively evaluating India as a jurisdiction.
The Finance Act, 2015, had introduced Section 9A to encourage fund management activity from India and provide a safe harbour to onshore management of offshore funds.
The objective was to ensure that these funds did not pay incremental tax just because they were managed in India, and the risk of constituting a business connection or permanent establishment in India was mitigated. Without the benefit of this section, offshore funds managed in India become tax residents.
The government has been continuously relaxing norms since a few years. Yet, only a handful of funds have received a nod under Section 9A so far, which is why experts believe bolder reforms are required, and several restrictive conditions in the section need a re-look.