Union Budget 2021: The Indian stock marketplace cheered the development-focused Budget presented early final week. Budget 2021 was anticipated to address a quantity of issues to stimulate development and to place the economy back on a roll.
The Honorable Finance Minister (‘FM’) in her Budget Speech re-emphasized on ‘Aatmanirbhar Bharat’ and offered a important increase to the infrastructure, healthcare, fintech, agriculture sectors and the all round start off-up ecosystem.
The FM right after obtaining round table discussions with the stake holders in the private equity and venture capital sector has positively responded to the demands of the investor neighborhood and has proposed numerous amendments from a tax and regulatory viewpoint.
The essential modifications proposed in the Budget 2021 which will effect Deals and Alternative Investment Industry going forward are as provided under:
a) Amendment in the definition of ‘Securities’
The Budget 2021 has proposed an amendment to the Securities Contract (Regulations) Act, 1956 (‘SECRA’) to consist of units of Alternative Investment Fund (‘AIF’), Infrastructure Investment Trust (‘InvIT’) and Real Estate Investment Trust (‘REIT’) in the definition of Securities as provided beneath SECRA. With this amendment the query on whether or not stamp duty of .015 % will apply on units of AIFs, InvITs and REITs will once again come into light as one of the arguments by the sector was these units are not covered beneath the definition of securities as provided beneath SECRA.
Further, with this amendment the argument that these units are not securities and will not attract present tax provisions beneath section 56(2)(x) will not be offered to investors. However, this amendment clears the ambiguity about lengthy-term capital gains tax price on sale of units by non-residents.
b) No withholding tax on dividend earnings paid to enterprise trust i.e REIT and InvIT
No withholding tax to apply on dividends paid by Special Purpose Vehicle to REIT / InvIT (in whose hands, such dividend is exempt). This will prevent money lock-up in the hands of enterprise trust and increase investors Internal Rate of Return (‘IRR’).
c) Higher Tax Deducted at Source (‘TDS’)
Higher TDS price is proposed for the non-filers of earnings-tax returns. Exemption is proposed for non-resident investors not obtaining Permanent Establishment in India. AIFs whilst distributing the earnings to its resident investors will have to rely on the representation offered by the investors with respect to the filing of earnings-tax return compliance.
d) Proposal impacting portfolio corporations
Proposal to exclude goodwill from the definition of ‘block of assets’ and disallowing depreciation on goodwill will have significant effect on concluded offers and handle offers. This proposal is absolutely going to effect the investor IRR.
Slump Exchange transactions are proposed to be taxable going forward. This proposal efficiently reduces tax structuring possibilities for the portfolio corporations, thereby impacting the investor returns.
e) Reduction of Re-assessment period
Time-limit for re-opening of assessment has been brought down from 4/6 years to 3 years from finish of relevant assessment year only in precise instances time-limit of 3 years can be enhanced to 10 years. This will positively effect the deal indemnity negotiations at the time of exits, on account of reduction in the look back period.
f) Non-resident purchasers to undertake more compliance
.1 % TDS applicable on buy of goods from resident seller. This will outcome into particular more compliance for the non-residents acquiring shares from residents.
Relaxation in tax laws aimed at attracting institutional fund flow in India:
a) Rationalization of circumstances for tax exemption to Sovereign Wealth Fund (‘SWF’) and Pension Fund (‘PF’)
Finance Act 2020 offered exemption for dividend, interest and lengthy-term capital gains earned by notified SWF and PF from investments in specified Infrastructure sector, topic to circumstances. Satisfying some of the specified circumstances designed challenges and the FM has proposed to unwind particular circumstances as described under:
Allow SWF / PF to invest by means of domestic holding organization set up right after 1 April 2021 with minimum 75% investment in one or more entities engaged in specified infrastructure sector. While the investment by SWF / PF is eligible for exemption, the earnings earned by the domestic holding organization does not appear to be covered by the exemption, this could possibly outcome in money trap and effect investors IRR.
Exemption extended to SWFs and PFs that invest in AIF topic to particular investment circumstances. This need to aid AIFs which have numerous SWFs and PFs as their investors.
The definition of eligible investments is proposed to be expanded to consist of Non-Banking Finance Company – Infrastructure Debt Fund / Infrastructure Finance Company, topic to circumstances.
Certain other onerous circumstances with respect to undertaking ‘commercial activity’, leveraging and so on. has been proposed to be relaxed.
The above proposals set the tone for welcoming SWFs and PFs for investments into India.
b) Tax exemption on relocation of assets held by offshore funds to fund set up in International Financial Services Center (‘IFSC’)
In order to market IFSC, tax incentives have been proposed for relocation of assets held by offshore funds to funds set up in IFSC, resulting into no taxes in the hands of the offshore funds and their respective investors on account of the relocation albeit topic to circumstances.
c) Relaxation of Safe Harbor Rules for funds / manager in IFSC
Certain stringent circumstances for availing protected harbor for offshore funds shall not apply or apply with modifications to eligible investment fund or its eligible fund manager, situated in IFSC, topic to particular circumstances. This has opened paths for numerous funds / manager to reconsider relocating in IFSC.
The Finance Minister has offered the a great deal-expected relief to the pandemic-hit Indian economy with the tax proposals and have endeavored to make India a more desirable location for investments with an objective of ease of undertaking enterprise and minimum government and maximum governance.
(By Kalpesh Desai, Partner, M&A and Private Equity, Tax, KPMG in India, and Shital Gharge, Director, Private Equity Tax, KPMG in India)