I-T exemption on sovereign wealth funds’ income from infra investment notified

In order to boost foreign investment in infrastructure, the Income Tax Department has notified norms for tax exemption on interest, dividend and capital gain incomes of sovereign wealth funds (SWFs) and global pension funds arising from their investments in infrastructure here.

The notification is a follow-up to a new provision (Section 10-clause 23FE) of the Finance Act 2020 which talks about tax exemption to certain category of non-resident investors on their income streams such as dividends, interest and capital gains. The exemption will be applicable on “any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or share capital or unit if the investment is made on or after April 1, 2020 but on or before March 31, 2024 and is held for at least three years.”

The provision is meant for global investors such as Abu Dhabi Investment Authority through their wholly owned subsidiary, Sovereign Wealth Funds and Pension Funds and increases their commitment/allocations to India. Experts say, based on the notification dated July 6, investments made by these investor funds directly or through vehicles such Category-I or Category-II Alternative Investment Fund (AIF) into as many as 34 defined infrastructure sectors will qualify for exemption.

The notification issued finally aligns the definition of the term “infrastructure facility” with the Harmonised Master List issued by the Finance Ministry in 2018. Pursuant to the notification, investing in Indian infrastructure would turn attractive, unmindful of hasty down grade of country ratings and allow long-term stable capital to chase high quality infrastructure projects.

“Allowing such a wide-ranging list of qualifying investments for tax incentives would allow capital formation to flow into social infrastructure such as educational institutions, sports stadiums, tourism, operationalise long pending investment creation of theme-based parks including food parks, mult-modal logistics parks and textile parks,” Aravind Srivatsan, Partner at Nangia Andersen LLP said. Further, themes which resonate with the new India such as city gas distribution network, bulk material transportation pipelines, urban public transport and rail infrastructure will also qualify.

It is further expected that the recent reforms announced for unshackling the agriculture sector which requires massive investments into inter-alia cold-chain, post-harvest storage infrastructure which are now considered as infrastructure, will direct organised funding for such projects and allow consolidation and professionalism into much needed sectors to reboot the economy and bring back growth. Experts hope significant uptick in AIF activity and see dedicated Infrastructure AIF to be set up.

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