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Income tax exemption on sovereign wealth funds' income from infra investment: CBDT
July, 08th 2020

The income tax (I-T) department has notified tax exemption on interest, dividend and capital gain incomes of sovereign wealth funds (SWFs) and global pension funds arising from their investment in Indian infrastructure.

The Central Board of Direct Taxes (CBDT) through a notification dated July 6 has 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.

Nangia Andersen LLP Partner Aravind Srivatsan said the Section 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.

"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," Srivatsan said.

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

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."

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.

"Pursuant to this notification, investing in India infrastructure would turn attractive, unmindful of hasty downgrade of the country's ratings and allow long-term stable capital to chase high-quality infrastructure projects," Srivatsan added.

Also, such a wide-ranging list of qualifying investments for tax incentives would allow capital formation to flow into social infrastructure such as educational institutions, sport stadiums, tourism, operationalise long-pending investment creation of theme based parks including food parks, mult-modal logistics parks and textile parks, he said.

Themes that resonate with the New India such as city gas distribution network, bulk material transportation pipelines, urban public transport, rail infrastructure will also qualify, he said.

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