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Income tax department notifies exemption for sovereign wealth funds
July, 08th 2020

Aimed at attracting more investments into the country, the income tax department has issued a notification giving sovereign wealth funds and global pension funds the benefit of income tax exemption on their investment in Indian infrastructure. The tax exemption will apply to interest, dividend and capital gain incomes.

In a notification, the Central Board of Direct Taxes (CBDT) widened the scope of 'infrastructure' for the purpose of claiming income tax exemption under Section 10 (23FE) of the I-T Act introduced via the Finance Act 2020. The said Section permits a complete tax exemption to certain exclusive category of non-resident investors on their income streams such as dividends, interest and capital gains.

This notification shall come into force from April 1, 2021, and shall be applicable for the assessment year (AY) 2021-22 and subsequent AYs.

Finance Minister Nirmala Sitharaman had in Budget 2020 announced tax exemption for such infrastructure investments in India.

"In order to incentivise the investment made by the sovereign wealth fund of foreign governments in the priority sectors, I propose to grant 100 per cent tax exemption to their interest, dividend and capital gains incomes in respect of investment made in infrastructure and other notified sectors before March 31, 2024, and with a minimum lock-in period of 3 years," she had said.

The CBDT notification aligns the definition of the term "infrastructure facility" with the harmonised master list issued by the Department of Economic Affairs in 2018.

AKM Global Tax Partner Amit Maheshwari said considering India's need for huge investment in infrastructure, this is a good move. "This will attract sovereign funds to a more diverse range of infrastructure companies into sectors like telecom, energy, logistics, hospitals, and cold chains."

"Pursuant to the notification, investments made by these investors fund directly or through vehicles such as AIF (alternative investment fund) into as many as 34 defined infrastructure sectors will qualify," Nangia Andersen LLP Partner Aravind Srivatsan said.

He pointed out that the new rule was aimed at targeting select group of investors such as the Abu Dhabi Investment Authority through their wholly-owned subsidiary, SWFs and pension funds so that they increase their commitment or allocations to India.

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