Tax sops for the financial sector

Source: The Hindu BusinessLine

The Finance Minister has covered good ground, but more needs to be done

The focus areas in the Budget have been retracting black money, pushing infrastructure, financial sector reforms and propelling foreign investments besides providing clarity on taxes. Taking up the latter, below are some key tax proposals that can affect the financial sector.

REITs and AIF

For those looking to invest in alternative funds or tap into the AIF pool, here’s some cheer. Hitherto, the tax regime provided for tax pass through benefits to a limited segment within the AIF sector only.

The Budget proposes to extend the tax pass through status to all Category I and Category II AIFs irrespective of its nature. This unconditional pass through status should aid fund raising in the Indian financial markets by AIFs for infusion of venture capital in start-ups. Similarly, in the case of Real Estate Investment Trusts (REITs), there was no clarity on how taxes on rental income will be treated — whether they would be passed through to the unitholder or charged to the REIT entity.

The Budget has clarified that it will be passed through. For REITs and Infrastructure Investment Trusts (InvIT) — collectively referred to as Business Trusts — though, on the whole, the Budget provides half-hearted amendments. One stumbling block preventing the take-off of Business Trusts was the absence of a concessional capital gains tax regime for the sponsors holding units of the Trust.

While certain relaxations are now provided to the sponsors, many other issues, including MAT implications for the sponsors and stamp duty exemptions for transfer of assets, remain unaddressed. Even the amendments granting pass through status for the rental income earned by REITs raise questions regarding the manner of taxability in the hands of the unit holders, MAT implications for the unit holders and ways to avail of tax holidays on such income. The government is keen to incentivise fund managers to operate from India and not from overseas just for tax purposes. The Budget suggests concrete measures in this regard. Now, the location of fund managers in India would not constitute business connection of the offshore funds in India, subject to conditions.

The benefits are sought to be provided to broad-based and large funds. Likewise, conditions such as limitations on profit participation of the fund manager in the fund, the fund manager not being connected to the fund, and restriction on the stake that Indian tax residents hold in the funds are meant to prevent the abuse of these relaxations.

These conditions appear stringent but are necessary, considering that this is a fledgling industry here.

Taxing indirect transfers

The notorious indirect transfer tax provisions begged for clarity since the time they were introduced. This has now been provided. The provision applies now to transfer of a foreign share or interest where it derives a substantial value (50 per cent or more and with absolute value of above ₹10 crore) from gross assets (without offsetting liabilities) in India. Also, only proportionate gains would be taxable in India. The investor community will be happy that the proposal is detailed and thorough. This includes laying down thresholds and safe harbour rules and addressing computation mechanism for taxability in India. While the provisions don’t necessarily benefiit taxpayers, they provide a level of certainty which was missing.