India Proposes Changes to Tax Laws to Attract Foreign Capital and Boost Fund Management Industry

The Centre has reportedly proposed changes to tax laws that would allow offshore investment funds to appoint India-based fund managers without automatically attracting the country’s tax liability. According to a report by Reuters, this development aims to boost the country’s fund management industry and attract foreign capital. The proposal, part of a draft tax amendment bill, seeks to simplify the existing “safe harbour” framework governing offshore investment funds. The government reportedly said the changes intend to promote fund management activity in India while providing greater tax certainty to overseas investors . The move comes as India has witnessed significant foreign capital outflows, prompting policymakers to explore measures that make the country a more attractive investment destination. Foreign investors have also long raised concerns over India’s tax administration and compliance framework. Under the current tax regime, offshore funds must satisfy several conditions to avoid being treated as having a taxable business presence in India because they use an India-based fund manager. These include maintaining a minimum corpus of Rs 100 crore, having at least 20 investors and ensuring that no single investor contributes more than 25% of the fund’s capital, the report stated. Failure to meet these conditions can result in India-sourced profits being taxed at rates of up to 38%. The draft bill proposed to remove these minimum size and investor diversification requirements altogether. If Parliament approves it, offshore funds could appoint Indian fund managers irrespective of their asset size or investor concentration without triggering Indian tax liability, provided they meet the remaining eligibility criteria. While easing compliance requirements, the proposed framework retains certain safeguards. To qualify for the tax exemption, domestic investors cannot account for more than 5% of a fund’s assets, and the offshore fund must not exercise control over any business operating in India. These conditions are intended to ensure that the tax relief benefits genuine offshore investment vehicles rather than structures designed primarily for domestic investments, Reuters reported. Quoting tax experts, Reuters reported that the proposed changes would simplify the regulatory framework and strengthen India’s position as a fund management hub. Girish Vanvari, founding partner at Transaction Square, told the agency that the amendments replace a highly prescriptive regime with a simpler substance-based framework. According to him, the proposal substantially reduces the risk of offshore funds being regarded as having a “business connection” in India, and therefore becoming taxable, merely because their investment manager is located in the country. Nehal Sampat, partner at PricewaterhouseCoopers (PwC), said offshore funds had often struggled to comply with the existing safe harbour conditions while appointing India-based managers. He described the proposal as a significant ease-of-doing-business measure likely to encourage more offshore funds to hire onshore investment managers.