Offshore funds: Budget provides tax fillip to fund management activity

The Union Budget has sweetened the deal for foreign fund managers looking to set up base in India. It has relaxed two important conditions that were to be met, among others, for offshore investment funds and their fund managers to escape the tax net in India.

The two conditions relate to the corpus requirement of the fund and the remuneration payable by the fund to the fund manager.

Fund corpus: There is a requirement that the monthly average of the corpus of the fund should not be less than ₹100 crore. Currently, if the fund is established during the year, the condition has to be met at the end of such a year. It is now proposed that a relaxation will be provided to such funds for meeting the corpus requirement at the end of six months from the date of establishment of the fund or the end of the year, whichever is later.

Fund manager pay: Currently, it is required that the remuneration paid by the fund to an eligible fund manager should not be less than the arms length price. It is proposed that this will be changed to a minimum remuneration calculated in a manner prescribed by the Central Board of Direct Taxes (CBDT).

Gautam Mehra, Tax Leader, PwC India, said that the changes proposed to Section 9A address a couple of operational aspects which would be helpful for players looking to take advantage of the safe harbour rules.

“It would be beneficial if these rules are also extended to offer this route to private equity asset managers in the unlisted space,” Mehra told BusinessLine .

Welcome move

Lokesh Shah, Partner, L&L Partners, a law firm, said that both the relaxations in the Finance Bill are welcome. “It would have been better if conditions relating to investment diversification and broad basing of funds were further relaxed. The industry will now eagerly await the methodology to calculate the management fee in place of the current requirement to pay management fee at an arm’s length price,” he said.

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said that the amendments proposed should provide a fillip and further incentivise the localisation of fund management activity housed in India.

“It equally depicts a serious resolve in creating a conducive ecosystem in promoting India as an alternative destination for offshore fund managers,” he said.

Amit Maheshwari, Partner, Ashok Maheshwary & Co LLP, said, “Unfortunately till now Section 9A has not helped in attracting fund managers to set up base to India. They have now relaxed a condition by proposing that the corpus of the fund could be at the end of six months from the month of establishment or at the end of the tax year, whichever is later.”

This is a welcome relaxation as it was posing genuine difficulties. Also, the benchmark for the remuneration of the fund manager would be prescribed by CBDT rather than current reliance on the arms length price which could have resulted in uncertainty, especially if it would have been disputed by the tax authorities.

Also, it remains to be seen how much will these amendments incentivise fund managers to shift base to India.

Section 9A of the Act provides that “eligible” offshore investment funds do not constitute a business connection in India by virtue of the activities carried out by the “eligible” fund manager. Moreover, the presence of the fund manager in India does not result in the fund qualifying as a tax resident of India. To qualify as an eligible fund and a manager, certain conditions are prescribed.