Rationalisation of provisions related to Sovereign Wealth Fund (SWF) and Pension Fund (PF)
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
- (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
- (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.
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.