In what could result in a huge relief for the Indian fund industry, the finance ministry has nudged the CBDT (Central Board of Direct Taxes) to issue a clarification on the taxation of fund managers of an offshore fund. The ministry believes that fund managers managing offshore funds are being driven out of India to Singapore due to adverse tax provisions, reports CNBC-TV18’s Payaswini Upadhyay.

In a letter dated September 9, the finance ministry had directed the CBDT to clarify that simply because a fund manager of an offshore fund is located in India; it would not constitute a business connection. Also read: Tide has turned, EM ETFs seeing good inflows: Morningstar The concept becomes important because once a business connection is constituted; the Indian fund becomes a permanent establishment liable to be taxed at 40 percent.

Nishchal Joshipura, head - funds practice, Nishith Desai Associates says, “Currently, the way the funds have been operating is that they have an Indian advisory company, which makes non-binding recommendations on the investment and divestment to the offshore fund management entity. In turn, it makes recommendations to the fund.

The board of the fund ultimately takes a decision on whether to invest or divest from India. The issue which comes up as on the ground presence is required, especially in case of private equity funds. A lot of ground work is needed and the core team usually sits in India.” Several countries including the United Kingdom, Singapore, Hong Kong, United States, and New Zealand provide for a safe harbour to prevent offshore funds from having a taxable presence in their respective jurisdictions.

The industry is expecting a similar clarity from the CBDT. “I would like to see clarity on the list of activities which a fund manager can do- as long as the fund manager is doing 10 activities, the tax authorities should not be going into whether those activities could still constitute permanent establishment”, adds Joshipura In India, the offshore funds face the risk of high tax rate and consequently lower returns, which make it a less attractive destination for pooling capital. The expected clarification from the CBDT will address this concern and may be bring the fund managers back home.