The finance ministry on Wednesday amended the income tax rules making it easier for offshore funds to relocate fund management to India.
Section 9A of the Income-Tax Act provides a special taxation regime for offshore funds if their fund managers are located in India. This was done to ensure that more fund management is done in India without adverse tax implications. The section was first introduced in April 2016. It then said that only a fund manager’s income or management fee, and not the entire global income of the global fund, will be subject to tax. This was expected to open the floodgates and prompt more Indian fund managers located outside the country to return. However, there was lack of clarity on how much the Indian fund manager’s remuneration or fee should be to be eligible for section 9A relaxation, prompting the bulk of fund managers not to opt for this route.
The Central Board of Direct Taxes then floated draft norms in December 2019 to clarify the rules on remuneration or management fee. The ministry said on 27 May that for a 9A special dispensation foreign portfolio investor (FPI) category 1, which includes sovereign wealth funds and pension funds, the amount of remuneration or management fee paid by the fund to the Indian fund manager needs to be at least 0.1% of the AUM. For category 2 FPIs, typically hedge funds, the fund management fees has to 0.3% of AUM or at least 50% of the total management fee. These new clarifications are expected to boost flows in India as fund managers will be closer to the deal ecosystem. As of today there are asset managers whose plans to shift fund management to India was in limbo because of this lack of clarification. These include Eastspring India Fixed Income and Balanced funds from Japan and Taiwan advised by ICICI Prudential International Business, an equity fund by Avendus Capital, and White Oak Capital Management, a boutique firm from Mauritius.
“These thresholds further refine the 9A rules and make onshore management of foreign funds easier for local asset managers like us. This avoids any adverse tax implications on the fund or FPI for the foreign assets being managed from Mumbai. Now at least there is clarity at what level of management fee can a Cat 2 offshore fund or any mandate from Cat 1 FPIs be managed with an Indian fund manager under section 9A without any risk of impacting the safe harbour provisions that this very policy enables," said a spokesperson for ICICI. Avendus could not comment immediately.