Driven by tax sops, hedge funds head to Gift City

Hedge funds (Category III AIFs that raise monies from non-resident investors) are showing increased interest to set up base in the Gift City (International Financial Service Centre) now that government has sweetened the deal for such funds on the taxation front bringing the regime in line with the offshore tax treaties, say experts.

Significant benefits such as zero tax on bond trading or derivative trading and reduced tax rates on interest and dividend are now being offered by the government to Category III funds (with non resident investors) operating out of IFSC Gift City, they said. This has been done through the taxation amendment law that got enacted in the just concluded Monsoon session of Parliament. Not only on tax treatment, Category III funds setting up structures out of IFSC ( Gift City) will not be required to file returns or obtain PAN numbers, going by the recent tax law changes, they added.

Prior to this enactment, there was no specific tax regime under domestic laws in respect of Category III AIFs. From taxation perspective, only Category I and II funds enjoy pass through status under domestic laws. Because of the tax issue (absence of tax benefits), Category III funds were not willing to set up base in IFSC (GIFT City).

“We can say several FPIs already based out of Singapore, Mauritius are now looking at setting up Category-III type structures in IFSC Gift City,” they added.

“There is now lot of excitement and interest among Category III AIFs. It’s only two weeks since the law got amended. People are evaluating the structures to see what they can do. This will encourage more AIFs to come to IFSC Gift City,” Tushar Sachade, Partner, Tax and Regulatory Services, PwC India told BusinessLine.

Can come directly now

“Category III AIFs that are raising foreign money don’t need to go to Mauritius any more. They can be set up in IFSC GIFT City itself. For such funds setting up in IFSC Gift City, there will be zero tax on bond trading and zero tax on derivative trading in line with offshore treaties. Earlier, there was apprehension that such income will be fully taxed in India in line with domestic laws. If they were paying zero tax in Mauritius or Singapore, why would they come to India. Now this has been taken care through the recent changes in Indian income tax law,” he said.

He explained that earlier there was full tax on every income of such Category III funds and therefore setting a structure in IFSC Gift City was inferior than an offshore fund structure.

Renuka Ramnath, Chairperson, Indian Venture Capital and Private Equity Association and Founder, MD & CEO, Multiples Alternate Asset Management, said that relaxation for Category III AIF at IFSC like taxation on sale of listed equity shares now at par with domestic tax rates applicable to the FPIs, capping of surcharge at 15 per cent on certain income earned and removal of AMT provisions, are well-taken by industry participants.

This is a right move in the direction of making IFSC in India as a competitor to other jurisdictions. Earlier, non-resident investors of Category I and II AIFs registered at IFSC were provided exemption from filing return of income and obtaining PAN with certain conditions, she said.

Need automatic nod

To make IFSC a preferred destination to set up Funds for investing in and out of India, the PE and VC industry would recommend that IFSC AIFs be given automatic RBI approval for investment in India, relaxation in borrowings restriction and certain tax incentives for investor investing in IFSC AIFs, Ramnath added.

SEBI had in November 2018 come out with operating guidelines for AIFs and allowed them to set up structures in IFSC like Gift City in Gujarat. An AIF is basically a vehicle established for the purpose of raising capital from a number of investors with an aim to invest these funds into assets to generate favourable returns.