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FPIs, Private Equity Firms Search for New Routes to Invest in India

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Investment strategy being reworked due to Singapore tax treaty, GAAR arrival from FY18
As the Indian government amended the Singapore treaty to give clarity on taxation, many foreign portfolio investors (FPIs) and private equity firms are exploring new structures and routes for Indian investments, people in the know said.
The new routes or structures being explored by the investors are also in the context of GAAR (general anti-avoidance rule) -the direct taxation regulation that is set to come into force from April 1 this year.
Many FPIs are taking a relook at their investment strategy in the context of these two main changes, and whether they need to or could change the way they invest to save on some taxes.
“There are several recentim pending tax developments that investors will have to look at, including amended tax treaties, GAAR and also, what offshore transactions amount to indirect transfer of shares. In relation to private equity firms, given grandfathering of investments made till March 31, 2017, the real impact is likely to be felt only from FY 2021-22, as that's the likely time horizon when PE firms will exit their investments made post April 1, 2017,“ said Ketan Dalal, senior tax partner, PwC.
Experts point out that while the Singapore treaty would only impact foreign investors, GAAR is not just cross-border. GAAR is set to impact even Indian investors and companies, said experts.
Industry trackers say some smaller FPIs investing in India through Mauritius are looking at increasing the number of employees in the island nation.
“In some cases, some custodian and middle men are reaching out to these FPIs and offering that some employees be transferred to the latter's payroll. If FPIs don't have substance in Mauritius there will be adverse taxation, so this could be a way of showing that they actually have an operational base in Mauritius,“ a person in the know said.
On the other hand, tax officers said they are aware of such arrangements and assured that it will be difficult to circumvent regulations. “Foreign investors, who hitherto are protected by treaty exemptions, will need to rethink the strategy for their In dia investments due to re negotiation of tax treaties by India. They may choose to invest through different jurisdictions or structures; however, these structures will need to pass the substance test under GAAR which will come into effect from April 1, 2017,“ said Punit Shah, partner, Dhruva Advisors.
Some FPIs may even look at relocating to Singapore from Mauritius even as the treaty benefits in both cases are almost similar.“Singapore as a jurisdiction for investing into India could have a slight edge over Mauritius considering the proposed GAAR in India which will also come into force from April 2017,“ said Rajesh H Gandhi, partner, Deloitte Haskins & Sells.
The Economic Times New Delhi,02th January 2017

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