Offshore funds can take advance ruling from CBDT from April 1

6:01 PM
NEW DELHI: To provide an element of certainty to offshore fund managers, the revenue department today said such fund managers from April 1 can take prior ruling from CBDT on whether they are liable to pay tax in India.

In a statement, the Central Board of Direct Taxes (CBDT) said the rules for operationalisation of the provisions of Section 9A of the I-T Act have been inserted in the Income-tax Rules, 1961.

The norms provide for "a pre-approval mechanism under which a fund can seek approval at its option from CBDT, and once approved, benefit of Section 9A would not be denied unless approval is withdrawn under limited circumstances".

From April 1, 2016, the offshore funds will attract a special taxation regime under Section 9A, under which the fund management activity carried out through an eligible fund manager in India would not lead to the residence of the fund in India.

"This is a very important step as it will provide much certainty to offshore funds while at the same time remove any discretion and tax adventurism by tax officers," Nangia & Co Partner Rahul Jain said.

Section 9A of the I-T Act facilitated location of fund managers of offshore funds in India without Indian tax implications subject to certain conditions mentioned in the said section.

The rules also say that even if a fund is not diversified during the first 18 months or at the time of closure, it can still avail of tax break.

Further, structures where the fund is owned by an institutional investor and not by broad-based investors directly will no longer be ineligible.

Also, even if the fund manager is paid an arm's length remuneration in 2 out of previous 4 years, the fund will not be disqualified.

The fund management industry has demanded some easing of the rules of Section 9A.

Deloitte Haskins & Sells LLP Partner Rajesh H Gandhi said "CBDT has also introduced an advance ruling mechanism where a fund can approach CBDT and get certainty on whether it will be eligible for the tax exemption".

These rules have been framed keeping in mind industry demand for removing some of the difficult conditions imposed in the 2015 proposals and could now encourage some of the funds to seriously look at setting up shop in India, Gandhi added.

According to EY Financial Services Tax Partner Tejas Desai, the guidelines provide some important clarifications in relation to the qualifying conditions for the fund-like manner of determining resident Indian ownership, permitting look-through approach in determining the number of investors and the like.

Girish Vanvari, National Head of Tax, KPMG in India said the rules clarify that the fund will not be able to own more than 26 per cent in an Indian entity to avail of the exemption.

"One can argue whether the requirement of owning 26 per cent or less in a company is adequate. All in all, a step in the right direction," Vanvari said.

Source: Economic TImes

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