The Central Board of Direct Taxes (CBDT) has laid down the process for Sovereign Wealth Funds (SWFs) to claim ‘infrastructure’ income exemption, which, according to experts, aims to monitor the investment and grant exemption on a case-to-case basis.

According to the process defined by CBDT, for an SWF claim, return of income along with audit report are required to be filed along with a quarterly statement, electronically ― within one month from the end of the quarter ― in respect of each investment made during the quarter. The SWF will file application in the prescribed form, initially with the Member (Legislation) of CBDT, and thereafter, with the Member of CBDT having supervision and control over the work of Foreign Tax and Tax Research Division.

Going by the new circular, it seems CBDT will not grant a blanket exemption to all SWFs and will retain control and discretion to grant exemption on a case-to-case basis. Further, the government seems to be keen to monitor investments by SWFs through quarterly reports to be filed by the SWFs, probably to ensure that the investments are, in fact, made in eligible sectors and vehicles.

Considering the information required in the form, the SWF needs to get a PAN first and then submit all the documents with the application with regard to its ownership, regulation and activities, to the CBDT.

Finance Act 2020 prescribes tax exemption to the income of SWFs in the nature of dividend, interest or long-term capital gains arising from investment made by it in India. The investment is required to be made in specified infrastructure business during the period from April 1, 2020 and March 31, 2024 and held for at least three years.

Based on the notification issued earlier this month, as many as 34 defined infrastructure sectors will be available for investment. These include social infrastructure such as educational institutions, and sports stadiums; tourism, to operationalise long-pending investment creation of theme-based parks including food parks; multi-modal logistics parks and textile parks. Further, themes which resonate with New India such as city gas distribution network, bulk material transportation pipelines, urban public transport, and rail infrastructure will also qualify for attracting the investment.

Only those SWFs qualify for exemption which satisfy certain conditions, such as their ownership and regulation in the foreign country and are not engaged in any commercial activity in and outside India. Further, they need to be notified by the government.

According to Sunil Gidwani, Partner, Nangia Andersen LLP, since the income of the SWFs is exempt from the current year itself, CBDT’s announcement of the process for an SWF to get itself notified is timely. “One wonders how any SWF would undertake that it does not carry out any “commercial activity in or outside India” when as a matter of fact several SWFs are engaged in investment and related businesses. One hopes the CBDT, while approving and notifying SWFs for the purpose of exemption, takes a pragmatic view of what constitutes a commercial activity,” he said.

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