India recommends PE tax exemptions

A committee appointed by the prime minister of India has recommended that the proposed tax on indirect share transfers should not be applied retrospectively, according to a report released by the ministry of finance. 

If the recommendation is taken, the shift in policy would mean offshore private equity firms with existing assets outside India, but that generate substantial value from the country, would not be taxed in India.

The new recommendations also offer special exemptions for private equity GPs and LPs going forward, according to analysis done by local law firm Nishith Desai. 

If a private equity firm is domiciled in a jurisdiction with a double tax treaty agreement, such as Singapore or Mauritius, no tax would be applicable in India for any indirect share transfers. 

In addition, LPs that would have been taxed on dividends received by private equity funds invested in companies with India-based assets would likely be exempt under the Threshold Exemption assuming their commitment makes up less than 26 percent of the private equity fund. The committee outlined that individuals holding less than 26 percent ownership of a company should be excluded from paying indirect transfer tax.  

The Indian government has recognised the value of private equity compared to other asset classes due to its long-term commitment to businesses in the Indian market, according to Siddharth Shah, partner at Nishith Desai. 

He said: “The reduction in capital gains tax from 20 percent to 10 percent for foreign investors was in many senses pushed through by the private equity industry. Suddenly there has been a recognition that [private equity] has played a significant role in the development and growth of the Indian [market].”

These recommendations are the government body’s latest move to ease tax and regulatory concerns for private equity firms. 

Other recent developments included a report advising that the much-feared General Anti-Avoidance Rule, which would subject offshore private equity funds to Indian tax, should be deferred for three years. GAAR is currently scheduled to come in during 2013. Funds domiciled in Mauritius and Singapore can also expect further clarification on entitlement to tax treaty benefits, according to Nishith Desai. 

Although just recommendations, Shah believes it is likely they will be implemented. “From an economic perspective, the current status is, and this is where the interests are aligned for the [government] opposition and the current party, that India [needs] foreign direct investment.”