Tax liability norms eased on relocation of offshore funds

To facilitate relocation of offshore fund managers to India, the Budget has proposed that the tax liability on income generated from investment in India would not depend on whether the investment was made directly by the fund or through engagement of fund manager located in India.

Moreover, income of the fund from the investments outside India would not be taxable solely on the basis that the fund management activity of such investments was done through a fund manager located in India. Proposing a specific regime in line with international best practices subject to fulfilment of certain conditions by the fund and the fund manager, the Finance Ministry said in the case of an investment fund, the fund management activity carried out through a fund manager shall not constitute business connection in India.

Further, it has been proposed that an eligible investment fund shall not be said to be resident in India merely because the eligible fund manager undertaking fund management activities on its behalf is located in India.

This exception from the rules for determination of business connection and ‘resident status’ of off-shore funds and fund management activity undertaken on its behalf is subject to conditions for the fund and the person acting as its fund manager.

Tejesh Chitlangi, Partner IC Legal, said, “As a general practise, the fund managers of offshore India-centric funds are housed outside the country so as to showcase that the investment decisions are not being taken from India and, therefore, the offshore fund does not have a permanent establishment in India.

“The proposal to allow the fund managers of the offshore funds to be present in India is a good move. However, this would be subject to several dos and don’ts which the offshore fund and its Indian fund managers will have to comply with and hence the outcome will have to be assessed.”