Shifting to Singapore will allow category II FPIs to escape the higher tax liability imposed on them in Mauritius
Foreign funds are making changes to their structures to reduce their tax outgo
Mumbai: India-focused funds that use Mauritius for favourable tax treatment are planning to route their funds through Singapore, another tax haven, to escape higher tax liability after the Union budget removed some exemptions for those based in Mauritius, three foreign fund managers said.
This shift has been prompted by the budget levying indirect transfer provisions on category II foreign portfolio investors (FPIs) such as those routing their investments through Mauritius.
Shifting to Singapore will ensure that category II FPIs are not saddled with higher tax liability as the city state is still exempt from indirect transfer provisions, the fund managers said on condition of anonymity. The removal of exemptions will mean that investors in category II FPI funds have to pay capital gains tax on indirect transfer of shares or other assets.
The changes in tax provisions could see fund flows from Mauritius, which accounted for ₹4.37 trillion worth of portfolio investments into India last year, drying up. Mauritius was the second-largest source of foreign portfolio investments into India after the US in 2019. Singapore was the fourth highest.
“If the overseas transfer provisions are made applicable to category II FPIs, then there is a possibility of double taxation of the same income, that is, tax on gains earned on direct transfer of Indian securities by the FPIs and tax on gains earned by investors of the FPIs on the redemption of units in the FPIs," said Suresh Swamy, partner at PricewaterhouseCoopers. “It is suggested that the Finance Bill, 2020, may suitably be amended to exempt investors in category I and appropriately regulated funds under category II FPIs from the overseas transfer provisions."
While a majority of foreign funds were exempted from indirect transfer provisions in 2017, the Finance Bill of 2020 has removed exemptions for category II FPIs, which include hedge funds, and funds that are set up in countries not compliant with the Financial Action Task Force (FATF) norms to combat money laundering and terror financing. Mauritius is not an FATF jurisdiction.
“The Finance Bill has not extended the benefit of exemption from tax on indirect transfers to category II FPIs. This means that these FPIs would require a fair bit of restructuring if they want to reduce the tax outgo," said Daksha Baxi, head of international tax at law firm Cyril Amarchand Mangaldas.
Foreign funds are making changes to their structures to reduce their tax outgo.
“We are actively trying to change the structure of our $200 million fund. We are trying to find an asset manager in Singapore or get a majority of our investments to be routed from Singapore. In these two scenarios, we will fall in category I," said an India-focused fund manager, one of the three cited earlier.
The other big issue is the retrospective nature of the provisions. Investments made between September 2019 and 1 February 2020 by FPIs that don’t fall in category I will also attract indirect transfer tax provisions. “The bigger issue is the retrospective nature of the provisions," Baxi said. “It would be fair that this is clarified and these FPIs do not face such retrospective tax as many funds continued to make investments unaware of this negative impact they would have to face."