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Offshore funds hail CBDT for prior ruling norm
April, 12th 2016

Offshore funds have hailed the decision taken by the Central Board of Direct Taxes (CBDT) to provide the prior approval mechanism to foreign funds on tax liability in India.

Offshore funds have hailed the decision taken by the Central Board of Direct Taxes (CBDT) to provide the prior approval mechanism to foreign funds on tax liability in India. Fund managers and tax consultants FE spoke to said the circular was a step towards creation of a more consistent tax regime for foreign investors.

The new regulations have been added to the Income Tax Act as Section 9A and have come into effect from April 1, 2016. As per the new regime, once a fund receives pre-approval from CBDT, the benefits of Section 9A would not be denied to it unless the pre-approval itself is withdrawn under “limited circumstances”.

“In tune with the government’s policy, the notification does clarify some critical aspects, reduces the element of subjectivity, and also provides leeway as regards fulfillment of certain conditions for being eligible for the benefits provided in Section 9A of the Act. This indeed brings some relief to funds and fund managers,” said Bijal Ajinkya, partner at Khaitan & Co.

Offshore funds will attract a special taxation regime under Section 9A under which fund management activity carried out through an eligible fund manager in India will not lead to the residence of the fund in India, tax experts said.

The new rules have also provided offshore funds relaxation from investor diversification condition in the period of eighteen months or final closing of the fund in its setting up phase and in the one-year period of winding it up.

“The new regulations have been enacted to encourage some of the offshore funds to start operating from India, and will also help in reducing scope of litigation or arbitration for foreign funds. The rules will also curb any tax adventurism by tax officers,” said a senior tax consultant on condition of anonymity.

Last year, the government had waived the minimum alternate tax (MAT) on capital gains made by foreign institutional investors prior to April 1, 2015.

Through the amendment, the government had clarified that MAT provisions will not be applicable to FIIs/FPIs not having a place of business or permanent establishment in India for the period prior to April 1, 2015.

Offshore funds have hailed the decision taken by the Central Board of Direct Taxes (CBDT) to provide the prior approval mechanism to foreign funds on tax liability in India.

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