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Budget 2014: PE Sector Expectations

Published on Mon, Jun 30,2014 | 18:46, Updated at Wed, Jul 02 at 18:26Source : 

By: Punit Shah, Co Head- Tax, KPMG

India has slipped to the fourth position (from second and third position in the earlier years) in the latest ranking of the most favoured investment destinations as per UNCTAD's World Investment Report 2014. China, Indonesia and US are rated ahead of India.

Tax uncertainty continues to be a major cause of concern for global investors in India and can be considered as one of the key reasons for deal activity in India to have receded over the last couple of years.

The PE industry is bullish that with the new Government in place, Budget 2014 will introduce proposals that bring in certainty for the PE investors.

The major issues of concern for the PE industry have been anti-abuse provisions, retrospective taxation of indirect transfers, practical challenges around treaty availability and characterization of income.

As regards introductions of anti-abuse provisions, popularly known as GAAR, the primary concern is that the provisions are too broad based. Secondly, tax officers now have far-reaching powers which could be misused. There is a certain level of preparedness required for introduction of GAAR and the general impression seems to be that the Indian tax administration does not meet the test as yet. While GAAR is good to have, and is in line with how the international tax policies are evolving, it may be prudent for India to defer the same for a few years. Further, all investments made and existing as on the date of commencement of the GAAR provisions should be grandfathered so that on their exit on or after this date, GAAR provisions are not invoked.

Introduction of offshore transfer taxation with retrospective effect has marred India’s image and reversing the same would surely send positive signals in international markets. Secondly, the provisions related to indirect transfer currently could cover even taxation of gains arising to LPs in offshore PE funds on account of redemption of their investments in the pooling vehicle or inter se transfer amongst such LPs. LPs need to be specifically exempted from the coverage of taxation of indirect transfer.

While the current law as regards treaty availability is clear and is supported by a Supreme Court ruling, the ground reality is very different. This has led to needless litigation and tax withholding has become a major road block is most of the PE deals. It would help if the FM comes up with a clear provision on this, which deters the tax officers from holding the payer entity at ransom, on the matter of tax withholding.

There are other issues around which clarity is required such as long term capital gains tax rate in the case of unlisted private limited companies i.e. 20% vs 10%, the fate of beneficial treatment under Cyprus treaty as a result of Cyprus being announced as a notified jurisdictional area, etc. Also, abolishing the 20% buy back tax could give a boost to deal activity in India.

From a domestic fund perspective, it would be useful to provide tax pass thru status to all registered funds i.e. all AIFs instead of restricting it to only Cat I AIFs. Lastly, there needs to be certainty as regards characterisation of income for PE Funds.

As regards the Direct taxes Code (‘DTC’), there has been a lot of back and forth over its final form. Media reports seem to suggest that the new Government may want to start from scratch on DTC. It would help if the FM clarifies the position as regards the DTC since some of the concepts that were proposed to be introduced therein such as place of effective management, controlled foreign corporation, etc. would have far reaching implications on PE industry.

While it is widely acknowledged that the FM has several challenges on the macro front, with inflation, rising oil prices, impending fear of monsoon failure, etc. and hence limited room to maneuver with the finances; the expectation level is still high. One is hoping that the FM sends a loud and clear signal to the world that India means business and that policy flips-flops are things of the past.


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