Tax relief hope for PE funds

The finance ministry seems to have accepted the arguments of private equity funds that they are subject to the same rate of capital gains tax as foreign institutional investors.

Investments of private equity funds in unlisted firms are currently taxed at 20 per cent, while foreign institutional investors pay half of that rate.

It is anticipated that fresh amendments to the finance bill were likely once Parliament takes it up.

India’s proposed general anti-avoidance rules (GAAR), which stop funds from abusing the zero tax status of countries such as Mauritius, while playing on Indian bourses have unnerved the private funds.

GAAR, brought in this year’s finance bill, allows tax authorities to declare any business deal to be an “impermissible avoidance arrangement” if part or whole of the deal has been crafted with the intention of obtaining “tax benefits”.

The move to tax PEs on a par with FIIs was in the works for some time.PE firms, including big names such as Carlyle, Khazanah, Temasek and Warburg Pincus, reportedly sold off shares worth over $1.8 billion in the first three months of 2012, much of it after India announced that it would implement GAAR in the future.

The government would continue to reiterate through policy pronouncements that FIIs who had “substantial commercial interests” in any tax haven would continue to benefit from low or zero tax regimes of these countries as provided by the direct tax avoidance agreements signed with them.

“DTAAs will continue to be valid and are not being sought to be over-ridden,” as per the blog source.

The government will also make it clear that there will be no short- or long-term capital gains taxes for participatory note holders. There were apprehensions that participatory notes would be taxed under the new GAAR rules.

As per the finance ministry, the trading of participatory notes just led to the change of hands of a contract note or a derivative — underlying assets or shares in India do not change hands.

They wanted to set at rest “worries” of participatory holders who have as much as $20 billion of Indian stock assets in their portfolios.

Many investors, who want to test Indian stock markets or who wish to play without the bother of registering themselves with Sebi use these participatory notes, which are certificates with underlying Indian shares.

It’s estimated that FIIs have invested about 10 per cent of their approximately Rs 10,00,000-crore portfolio in India through participatory notes.