India proposes easing tax rules for offshore investment funds

India has proposed easing tax rules for offshore investment funds using India-based managers by removing size and investor limits, aiming to attract foreign capital and boost domestic fund management activity.

MUMBAI: India has proposed tax law amendments to shield offshore investment funds from Indian tax liabilities when they route investments through India-based fund managers, a draft bill showed.

The proposed change comes as the country faces significant foreign outflows, prompting the government to take measures to attract overseas investors by easing access. Investors have long complained about aggressive tax administration in India.

The government described the new rules as being framed "in order to promote fund management activity and provide tax certainty."

An email query sent to India's finance ministry was not answered immediately.

Under the existing rules, an offshore fund must maintain a minimum corpus of 1 billion Indian rupees ($10.49 million), have at least 20 investors, and cap any single investor's contribution at 25% in order to be shielded from Indian tax. Funds that fail to meet these conditions risk having their India-sourced profits taxed at rates of up to 38%.

The new bill proposes removing all minimum size and diversification requirements under the safe harbour rules, meaning offshore funds - regardless of their asset base or investor concentration - could use Indian fund managers without triggering a tax liability, provided the bill is passed by parliament.

"By replacing a highly prescriptive regime with a far simpler substance-based framework, the government has substantially reduced the risk of offshore funds being regarded as having a 'business connection' in India - and thus taxable - merely because their investment manager is located here," said Girish Vanvari, founding partner of Transaction Square, a business and tax advisory firm in India. The proposed rules have retained some safeguards such as not more than 5% of the fund's assets can be from domestic investors, and the fund cannot control business in India to be exempt from Indian tax exposure.

Nehal Sampat, a partner at PricewaterhouseCoopers, said offshore funds had previously struggled to comply with the safe harbour conditions when appointing onshore managers.

"This is a significant ease-of-doing-business measure, and it will provide a fillip to offshore funds to hire onshore managers," he said.