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government may soon clarify tax rules for permanent establishment
July, 15th 2015

The government may soon clarify tax rules making it easier for fund managers operating large India-dedicated funds to set up an office in the country, four months after finance minister Arun Jaitley announced in the budget about the government's intentions to do so.

The finance ministry and the central tax department board are on the verge of issuing clarifications on tax treatment for such funds who move their fund managers to India, people close to the development said.

Jaitley had announced in the budget in February that a fund manager who moves to India to manage assets largely invested in the country or in overseas markets will not be taxed at a higher rate than someone based overseas. The announcement followed pleas from many large financial institutions and overseas Indian professionals that the country was losing an opportunity to play host to international fund managers because of its tax laws.

This clarification should have removed any uncertainty but new rules in the budget documents about the number of investors in the fund still left many fund managers and professionals confused.After about six months of discussions and interactions with mutual funds, private equity players, analysts and capital markets regulator Sebi, the government is finally set to issue clarifications.

The clarifications are expected to govern the number of investors in a fund. In March, the government said each fund that wants to avail of tax concessions must have 25 limited partners or investors. Fund managers and tax professionals pointed out that this is always not possible. Many funds have either a single investor such as a large institutional fund or a sovereign fund.

On the global level, investors tend to come together, form a special purpose vehicle or an investment arm that then invests in a fund. Also, there are fund-of-funds that invests through one entity. Now these cannot be treated as just one investor. The government is set to clarify about the parent level fund and that those cannot be treated as one investor, people close to the development said.

"The government's intention in prescribing these conditions is to safeguard the quality of the offshore funds that are sought to be managed from India in terms of the jurisdictions that they belong to, their ownership pat tern and how they remunerate the fund manager," said Sameer Gupta, partner, financial services and tax leader, EY. He said the nature and extent of conditions proposed in India (in section 9A of the Income-Tax Act) are onerous and must be amended for rationalised growth of the fund management industry in India.

"The clarificatory notes in the PE would be around the tax implication of the fund in India, rules on arms length and related party transaction, eligibility of a fund manager amongst other," the official cited above said. A clarification is expected that would make it clear that a fund coming from countries with which India has a Double Taxation Avoidance Agreements (DTAA) would not be treated differently just because a fund manager sits in say , Mumbai or Ahmedabad.

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