Introduction:
9A-Certain activities not to constitute business connection in India Foreign portfolio investors, also known as foreign institutional investors, often face challenges in determining the characterization of income arising from transactions in securities – whether it qualifies as capital gain or business income. Additionally, fund managers managing the investments of such investors often remain outside India due to concerns about adverse tax consequences. To address this uncertainty, the Finance Bill of 2014 proposed an amendment to section 2
(14) of the Income Tax Act, 1961. This amendment redefines the term “capital asset” to include any security held by foreign institutional investors investing in accordance with regulations under the Securities and Exchange Board of India Act, 1992. As a result, income from the transfer of such securities by Foreign Portfolio Investors 9A-Certain activities not to constitute business connection in India (FPIs) is treated as capital gain, allowing them to avail benefits under sections 10(38) and 111A of the Income Tax Act, provided all stipulated provisions are met. However, these benefits were unavailable when income from securities transactions was classified as business income.
Analysis of Proposed Section 9A: 9A-Certain activities not to constitute business connection in India
The Finance Bill of 2015 aimed to address another uncertainty left unresolved by the 2014 Bill: adverse tax consequences arising from the presence of fund managers in India managing the funds of Foreign Portfolio Investors. To this end, a new section 9A was introduced. This section proposes the following:
Eligible Investment Fund and Fund Management Activity:
9A-Certain activities not to constitute business connection in India The fund management activity conducted through an eligible fund manager on behalf of an eligible investment fund will not be considered a business connection in India for the said fund. This provision overrides the existing subsection (1) of section 9, which addresses income deemed to accrue or arise in India due to business connections.
Residency Status of Investment Fund:
9A-Certain activities not to constitute business connection in India An eligible investment fund will not be deemed resident in India solely because the eligible fund manager, conducting fund management activities on its behalf, is situated in India. This provision overrides section 6, which contains provisions regarding residency in India.
Analysis of Proposed Section 9A:
The Finance Bill of 2015 aimed to address another uncertainty left unresolved by the 2014 Bill: adverse tax consequences arising from the presence of fund managers in India managing the 9A-Certain activities not to constitute business connection in India funds of Foreign Portfolio Investors (FPIs). This was a crucial issue as it affected the tax liabilities and operational feasibility of FPIs operating in India. The introduction of a new section, Section 9A, proposed significant changes to mitigate these concerns.
Exclusion of Fund Management Activity as Business Connection:
Under subsection (1) of Section 9A, the proposed provision clarifies that the fund management activity carried out by an eligible fund manager on behalf of an eligible investment fund shall not be considered a business connection in India for the said fund. 9A-Certain activities not to constitute business connection in India This amendment overrides the existing provisions of subsection (1)
of Section 9, which deal with income deemed to accrue or arise in India due to business connections. 9A-Certain activities not to constitute business connection in India By excluding fund management activity from the definition of business connection, the Finance Bill aimed to alleviate tax implications associated with the presence of fund managers in India.
Non-Residency Status of Investment Fund:
Subsection (2) of Section 9A addresses the residency status of eligible investment funds. It states that an eligible investment fund shall not be deemed resident in India solely because the eligible fund manager, conducting fund management activities on its behalf, is situated in India. This provision overrides Section 6, which contains provisions regarding residency in India.
9A-Certain activities not to constitute business connection in India By clarifying that the presence of a fund manager in India does not confer residency status on the investment fund, the Finance Bill aimed to provide certainty to FPIs regarding their tax liabilities and residency status in India.
Meaning of Eligible Investment Fund:
9A-Certain activities not to constitute business connection in India An eligible investment fund refers to a fund established, incorporated, or registered outside India, which gathers funds from its members for investment purposes and meets the following conditions:
(a) The fund is not a resident of India.
(b) The fund is a resident of a country or specified territory with which India has entered into a Double Taxation Avoidance Agreement (DTAA).
(c) The aggregate participation or investment in the fund by residents of India does not exceed five percent of the fund’s corpus.
(d) The fund and its activities are subject to applicable investor protection regulations in the country or specified territory where it is established, incorporated, or resident.
(e) The fund has a minimum of twenty-five members who are not connected persons, directly or indirectly.
(f) No member of the fund, along with connected persons, shall have a participation interest exceeding ten percent.
(g) The aggregate participation interest of ten or fewer members, along with their connected persons, in the fund shall be less than fifty percent.
(h) The fund shall not invest more than twenty percent of its corpus in any entity.
(i) The monthly average corpus of the fund shall not be less than one hundred crore rupees.
9A-Certain activities not to constitute business connection in India Additionally, if the fund has been established or incorporated in the previous year, the corpus of the fund shall not be less than one hundred crore rupees at the end of such previous year.
(j) 9A-Certain activities not to constitute business connection in India The fund is neither engaged in any activity that constitutes a business connection in India nor has any person acting on its behalf whose activities constitute a business connection in India, other than the activities undertaken by the eligible fund manager on its behalf.
Meaning of Eligible Fund Manager:
An eligible fund manager refers to any person engaged in the activity of fund management who meets the following conditions:
(a) The person is not an employee of the eligible investment fund or a connected person of the fund.
(b) The person is registered as a fund manager or an investment advisor in accordance with specified regulations.
(c) The individual is conducting fund management activities as part of their regular business operations.
(d) 9A-Certain activities not to constitute business connection in India The person, along with his connected persons, shall not be entitled, directly or indirectly, to more than twenty percent of the profits accruing or arising to the eligible investment fund from the transactions carried out by the fund through the fund manager.
Additionally, every eligible investment fund shall, in respect of its activities in a financial year, furnish a statement in the prescribed form to the prescribed income-tax authority within ninety days from the end of the financial year.
9A-Certain activities not to constitute business connection in India This statement should contain information relating to the fulfilment of the conditions specified in this section and provide other relevant information or documents as prescribed.
However, it’s important to note that nothing contained in section 9A shall have any effect on the scope of total income or determination of total income in the case of the eligible fund manager.
Meanings of Other Terms:
(a) “Associate” refers to an entity in which a director, trustee, partner, member, or fund manager of the investment fund holds, either individually or collectively, shares or interests exceeding fifteen percent of its share capital or interest, as applicable.
(b) “Corpus” denotes the total amount of funds raised for the purpose of investment by the eligible investment fund as of a particular date.
(c) “Connected person” is defined as per clause (4) of section 102.
(d) “Entity” encompasses any entity in which an eligible investment fund makes an investment.
(e) “Specified regulations” refer to the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993, or the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013, or any other regulations enacted under the Securities and Exchange Board of India Act, 1992, as notified by the Central Government under this clause.
Conclusion:
9A-Certain activities not to constitute business connection in India The introduction of the new section 9A is expected to prompt Foreign Portfolio Investors (FPIs) to shift their investment fund managers to India, leading to easier fund management processes. This shift is anticipated to create new opportunities for investment fund managers and generate employment. Additionally, it is anticipated that the revenue of the Indian Income Tax authority will increase, as the authority will also collect taxes from these fund managers. However, it’s important to note that the proposed section 9A does not offer any tax benefits to eligible fund managers. These fund managers will continue to be taxed as per existing provisions.
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