Rationalisation of provisions related to Sovereign Wealth Fund (SWF) and Pension Fund (PF) in Unon Budget 2021
Clause (23FE) of section 10 of the Act provides for the exemption to specified persons from the income in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India. Specified persons are SWF or PF which fulfils conditions prescribed therein and are specified for this purpose by the Central Government through notification in the Official Gazette. This provision was introduced through the Finance Act, 2020 to encourage investments of SWF and PF into infrastructure sector of India. Subsequent to enactment, a notification was also issued to enlarge the scope of infrastructure activities eligible for investments. One SWF has already been notified under this provision. In order to rationalise the provision of this clause and to remove the difficulties in meeting some of the conditions, the followings amendments are proposed in the Bill:
- Allowing Alternate Investment Fund (AIF) to invest up to 50% in non-eligible investments
Presently SWF/PFs may invest in a Category-I or Category-II Alternative Investment Fund, having 100% investment in eligible infrastructure company. It is proposed to:
(a) relax the condition of 100% to 50%.
(b) allow the investment by Category-I or Category-II AIF in an Infrastructure Investment Trust (InvIT).
(c) Exemption under this clause shall be calculated proportionately, in case if aggregate investment of AIF in infrastructure company or companies or in InvIT is less than 100%.
- Investment through holding company
Presently, SWF/PFs are not allowed to invest through holding company. It is proposed to allow the same subject to the following conditions:
(a) Holding company should be a domestic company.
(b) It should be set up and registered on or after 1st April, 2021.
(c) It should have minimum 75% investments in one or more infrastructure companies.
(d) Exemption under this clause shall be calculated proportionately, in case if aggregate investment of holding company in infrastructure company or companies is less than 100%
- Investment in NBFC- IDF/IFC (non-banking finance company-infrastructure debt fund/Infrastructure finance company)
Presently, SWF/PFs are not allowed to invest in NBFC-IFC/IDF. It is proposed to allow the same subject to the following conditions:
(a) NBFC-IDF/IFC should have minimum 90% lending to one or more infrastructure entities.
(b) Exemption under this clause shall be calculated proportionately, in case if aggregate lending of NBFC-IDF or NBFC-IFC in infrastructure company or companies is less than 100%.
- Loan or borrowings by SWF/Pension Fund
Presently, SWF/PFs are not allowed to have loans or borrowings or deposit or investments as there is a condition that no benefit should enure to private person. It is proposed to provide that there should not be any loan or borrowing for the purpose of making investment in India. It is also proposed to provide that the condition regarding no benefit to private person and assets going to government on dissolution would not apply to any payment made to creditor or depositor for loan taken or borrowing other than for the purpose of making investment in India.
- Commercial activity
Presently, SWF/PFs are not allowed to undertake any commercial activity. This condition is proposed to be removed and replaced with a condition that SWF/PFs shall not participate in day to day operation of investee. However, appointing director and executive director for monitoring the investment would not amount to participation in day to day operation.The term “investee” is propoed to define to mean a business trust or a company or an enterprise or an entity or a category I or II Alternative Investment Fund or an Infrastructure Investment Trust or a domestic company or an Infrastructure Finance Company or an Infrastrure Debt Fund, in which the SWF or PF, as the case may be, has made the investment, directly or indirectly, under the provisions of this clause.
- Liable to Tax
Presently, some PFs are liable to tax in their country though given exemption subsequently. It is proposed to amend this sub-clause to provide that if pension fund is liable to tax but exemption from taxation for all its income has been provided by the foreign country under whose laws it is created or established, then such pension fund shall also be eligible.
- Rules to prescribe the method of calculation
It is also proposed to provide that the Central Government may prescribe the method of calculation of 50% or 75% or 90%referred above.
This amendment will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.
[Clause 5]
Text of the Relevant Clause of the Finance Bill 2021
Clause 5 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.
The said section provides that in computing the total income of a previous year of any person, certain categories of income shall not be included in the total income.
Clause (23FE) of the section 10 provides for the exemption to specified person from the income in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India.
Item (c) of sub-clause (iii) of the said clause provides that the specified person may invest in a Category-I or Category-II Alternative Investment Fund regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, having hundred per cent. investment in one or more of the company or enterprise or entity referred to in item (b).
It is proposed to relax the said condition of “hundred per cent.” to “not less than fifty per cent”. It is further proposed to allow the investment by such Category-I or Category-II Alternative Investment Fund in an Infrastructure Investment Trust referred to in sub-clause (i) of clause (13A) of section 2.
It is also proposed to insert item (d) in sub-clause (iii) of the said clause allowing the investment by specified person in a domestic company set up and registered on or after 1st April, 2021, having minimum seventy-five per cent. investments in one or more of the company or enterprise or entity referred to in item (b).
It is also proposed to insert item (e) in the said sub-clause allowing the investment by specified person in a non-banking financial company registered as an Infrastructure Finance Company, as referred to in the notification number RBI/2009-10/316 issued by the Reserve Bank of India or in an Infrastructure Debt Fund, a non banking finance company as referred to in the master circular, namely, the Infrastructure Debt Fund-Non Banking Financial Companies (Reserve Bank) Directions, 2011, issued by the Reserve Bank of India, having minimum ninety per cent. investment in one or more of the companies or enterprises or entities referred to in item (b).
It is also proposed to insert fourth proviso to the said clause so as to provide that in case a Category-I or Category-II Alternative Investment Fund referred to in item (c) of sub-clause (iii) has investment of less than one hundred per cent. in one or more of the companies or enterprises or entities referred to in item (b) of the said sub-clause or in an Infrastructure Investment Trust referred to in item (c) of that sub-clause, income, accrued or arisen to or received or attributable to such investment, directly or indirectly, which is exempt under the said clause shall be calculated proportionately to the investment made in one or more of the companies or enterprises or entities referred to in item (b) of that sub-clause or in the Infrastructure Investment Trust referred to in item (c) of that sub-clause, in such manner as may be provided by rules.
It is also proposed to insert fifth proviso to the said clause so as to provide that in case a domestic company referred to in item (d) of sub-clause (iii) has investment of less than one hundred per cent. in one or more of the companies or enterprises or entities referred to in item (b) of the said sub-clause, income, accrued or arisen to or received or attributable to such investments, directly or indirectly, which is exempt under the said clause shall be calculated proportionately to the investment made in one or more of the companies or enterprises or entities referred to in item (b) of that sub-clause (iii), in such manner as may be provided by rules.
It is also proposed to insert sixth proviso to the said clause so as to provide that in case a non-banking financial company registered as an Infrastructure Finance Company or Infrastructure Debt Fund referred to in item (e) of sub-clause(iii), has lending of less than one hundred per cent. in one or more of the companies or enterprises or entities referred to in item (b) of the said sub-clause, income, accrued or arisen to or received or attributable to such lending, directly or indirectly, which is exempt under the said clause shall be calculated proportionately to the lending made in one or more of the companies or enterprises or entities referred to in item (b) of that sub-clause, in such manner as may be provided by rules.
It is also proposed to insert seventh proviso to the said clause so as to provide that in case a sovereign wealth fund or pension fund has loan or borrowing, directly or indirectly, for the purposes of making investment in India, such fund shall be deemed to be not eligible for exemption under this clause.
It is also proposed to number the Explanation as Explanation 1 thereof.
It is also proposed to insert a proviso to the sub-clauses (iii) and (iv) of clause (b) of the said Explanation 1 so as to provide that the provisions of sub-clauses (iii) and (iv) shall not apply to any payment made to creditors or depositors for loan taken or borrowing for purposes other than for making investment in India.
It is also proposed to amend sub-clause (v) of clause (b) of the said Explanation 1 so as to provide that the sovereign wealth fund does not participate in the day to day operations of investee but the monitoring mechanism to protect the investment with the investee including the right to appoint directors or executive director shall not be considered as participation in day to day operations of the investee.
It is also proposed to amend sub-clause (ii) of clause (c) of the said Explanation 1 so as to provide that if pension fund is liable to tax but exemption from taxation for all its income has been provided, by the foreign country under whose laws it is created or established, then such pension fund also would satisfy the condition mentioned in sub-clause (ii). It is also proposed to insert sub-clause (iiia) to the clause to provide that the pension fund does not participate in the day to day operations of investee but the monitoring mechanism to protect the investment with the investee including the right to appoint directors or executive director shall not be considered as participation in day to day operations of investee.
It is also proposed to insert a new Explanation 2 in the said clause to define the expressions “loan and borrowing” and “investee”.
It is also proposed to insert a new Explanation 3 so as to provide that the Central Government may, by rules, provide the method of calculation of “fifty per cent.” referred to in item (c) or “seventy-five per cent.” referred to in item (d) or “ninety per cent.” referred to in item (e), of sub-clause (iii) of the said clause.
These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
It is also proposed to insert a new clause (23FF) in the said section so as to exempt any income of the nature of capital gains, arising or received by a non-resident, which is on account of transfer of share of a company resident in India, by the resultant fund and such shares were transferred from the original fund to the resultant fund in relocation, and where capital gains on such shares were not chargeable to tax if that relocation had not taken place.
It is also proposed to refer to the definitions of the expressions “investment division of offshore banking unit”, “original fund”, “relocation” and “resultant fund” as defined in the Explantion to clause (viiac) and clause (viiad) of section 47.
These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
