Tax fears keep family offices at bay from investing in India despite Sebi leeway
Sebi recently announced operational guidelines for FPIs and depository participants.
Even as the market regulator recently allowed foreign portfolio investors (FPIs) and other market intermediaries to invest on behalf of their clients, lack of clarity over taxation is set to keep large investments away.
Up until now, a pool of money raised from investors could only be deployed together in a particular investment, similar to what mutual funds do. The recent regulations mean money raised from different investors by an FPI or a fund can be deployed in separate stocks. The fear in this case, tax experts say, is that will the investor or his family office need to file tax returns in India.
Tax experts and market participants said that while the relaxation in rules would provide much-needed flexibility to bring investment from foreign high net-worth individuals and family offices, lack of clarity over the tax issue could become a deal breaker.
“Several market intermediaries are now permitted to invest on behalf of clients; the present relaxations do away with conditions of broad-basing and having a common portfolio. From a tax perspective, prima facie it seems each client is likely to have to meet its tax obligations but suitable clarity from the authorities would be welcome,” said Sameer Gupta, partner, tax markets leader, EY India.
The Securities and Exchange Board of India recently announced operational guidelines for FPIs and depository participants. As per the new regulations, a market intermediary, including foreign asset management companies, portfolio managers and investment advisers, can raise money from different investors and invest that separately.
While foreign investors might see this as a positive development, they would seek clarity over taxation before taking this route of investment, said experts.
As per current tax regulations, the “ultimate beneficiary” is required to file a tax return, they said. Most FPIs and PE funds pay taxes on the combined returns as they invest the money from a common pool. However, if they are investing it separately, the tax department may come to the conclusion that the ultimate beneficiary is not the fund or the FPI but the family office or the investor. In that case, the ultimate beneficiary would be required to pay tax and file the returns.
“Since the private bank will not be investing into India as a pooled vehicle or fund, it will be useful if the CBDT (Central Board of Direct Taxes) could also issue some guidance on how such structures would be taxed and whether the ultimate investor or the private bank will be considered as the taxpayer. Ideally, the ultimate investors should not be asked to get a PAN and file tax returns in India because they will be using the private bank platform to invest in India,” said Rajesh H Gandhi, partner, Deloitte India.