The Central Government led by India’s Prime Minister, Narendra Modi completed 2 years in office this month. While a lot of initiatives have been implemented and there is a feel good factor, some strong steps need to be taken to propel India to the top league for foreign investment. One such bold action taken this month was to plug a long pending loophole in the India Mauritius tax treaty making it more transparent in tax matters. Here are some of the recent changes relating to foreign investment.
FDI in Asset Reconstruction Companies (ARCs) – The FDI policy with respect to foreign investment for ARCs was liberalized. The investment has been put under the automatic route with 100% FDI allowed. Earlier it was 100% with 49% under the automatic route and Government (approval) route beyond that. Among ‘other conditions’ it has been now specified that investment limit of a sponsor and investment by institutional/non-institutional investors in the shareholding of an ARC will be governed by the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Also FIIs/FPIs may be allowed investment upto 100% (as against earlier 74%) of each tranche of in SRs issued by ARCs, subject to directions/guidelines of Reserve Bank of India.
FDI in Alternative Investment Vehicles & Investment Vehicles – Foreign investment is now allowed in the units of Investment Vehicles registered and regulated by Securities and Exchange Board of India (SEBI) or any other competent authority. This was notified vide Foreign Investment in units issued by Real Estate Investment Trusts, Infrastructure Investment Trusts and Alternative Investment Funds governed by SEBI regulations dated April 21, 2016. At present, Investment Vehicle will include the following:
- Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014;
- Infrastructure Investment Trusts (InvITs) registered and regulated under the SEBI (InvITs) Regulations, 2014;
- Alternative Investment Funds (AIFs) registered and regulated under the SEBI (AIFs) Regulations 2012.
The salient features of the new investment regime are:
- A person resident outside India including a Registered Foreign Portfolio Investor (RFPI) and a Non-Resident Indian (NRI) may invest in units of Investment Vehicles.
- Downstream investment by an Investment Vehicle shall be regarded as foreign investment if either the Sponsor or the Manager or the Investment Manager is not Indian ‘owned and controlled’ as defined in the Foreign Exchange Management Act, 1999.
- In case the sponsors or managers or investment managers are organized in a form other than companies or LLPs, SEBI shall determine whether the sponsor or manager or investment manager is foreign owned and controlled.
- The extent of foreign investment in the corpus of the Investment Vehicle will not be a factor to determine as to whether downstream investment of the Investment Vehicle concerned is foreign investment or not.
- Downstream investment by an Investment Vehicle that is reckoned as foreign investment shall have to conform to the sectoral caps and conditions / restrictions, if any, as applicable to the company in which the downstream investment is made as per the extant FDI Policy.
- An Alternative Investment Fund Category III with foreign investment shall make portfolio investment in only those securities or instruments in which a RFPI is allowed to invest.
It is now clarified that foreign investment in units of REITs registered and regulated under the SEBI (REITs) Regulations, 2014 will not be included in “real estate business” (prohibited for FDI) for the purpose of these regulations.
India Mauritius Tax Treaty – India and Mauritius recently signed the Protocol for amendment of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains. One of the major changes sought by the Protocol is to tax capital gains arising from alienation of shares acquired on or after April 1, 2017 in a company resident in India with effect from financial year 2017-18. Further, in respect of such capital gains arising during the transition period from April 1, 2017 to March 31, 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.
The tough decision to bring about these changes has been repeatedly ignored by previous governments leading to regular treaty abuse and round tripping of funds attributed to the India-Mauritius treaty. The amendment is expected to curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.
It may be noted that investments made before April 1, 2017 will not be subject to capital gains taxation in India.