India: Tax incentives for sovereign wealth fund investments, budget proposals
13 February 2020
The Union Budget 2020, presented 1 February 2020, proposed incentives for sovereign wealth fund investments made by companies involved in infrastructure development.
The budget proposals would aim to incentivize investments by sovereign wealth funds of foreign governments in certain priority sectors by providing a tax exemption on interest, dividends and long-term capital gains income in respect of investments made in specified infrastructure sectors. Eligible investments would need to be made before 31 March 2024 either in the form of debt or equity and with a minimum lock-in period of three years.
Currently, Indian domestic companies pay a dividend distribution tax at a tax rate of 15% (for an effective tax rate of 20.56%) and the dividend is exempt in the hands of the shareholder / investor recipients. A proposal in the Finance Bill, 2020 would repeal the dividend distribution tax and instead would tax the dividend income in the hands of the investors (effective 1 April 2020). The income would be taxed, as follows:
- For foreign portfolio investors, dividend income and income on units of mutual funds would be taxed at the rate of 20% and withholding at a rate of 20% under domestic law.
- Dividend received on global depository receipts (GDRs) to be taxed at the rate of 10% and withholding at a rate of 10% under domestic law.
- Dividend distributed by business trusts to be taxed in the hands of the unit holder and taxes to be withheld at the rate of 10% under domestic law.
Surcharge and health and education cess would also apply at the applicable rates.
Currently, foreign investors could not claim any tax credit for the dividends distribution tax paid; under the proposal, a foreign investor could assert tax treaty benefits, with the rates ranging between 5% to 25%.
There are also proposals to:
- Extend passthrough status extended to unlisted business trusts
- Exempt category 1 Foreign Portfolio Investors from applicability of indirect transfer provisions
- Extend rules that exempt non-residents from filing return of income to those non-residents whose total income consists of only royalty or fees for technical services
- Modify the safe harbor rules for offshore funds to appoint an India-based fund manager without being regarded as having business connection in India
Read a February 2020 report [PDF 267 KB] prepared by the KPMG member firm in India