India sends mixed message on alternatives

Finance minister Jaitley's budget withheld much anticipated clarity on PE issues, while backing real assets

The General Anti-Avoidance Rule (GAAR), a key sticking point for private equity firms in India, has not been further clarified in the country’s 2014 budget announced last week, dashing hopes that GPs would have immediate clarity on tax concerns in the country.

The new government, led by recently elected prime minister Narendra Modi, has not deferred the implementation of GAAR for another year, which industry players had hoped, but has also failed to offer more clarity on some ambiguous legal terms and the application of the rules once active.

As it stands, the regulations, which are designed to prevent private equity firms from benefiting from off-shore tax havens thus avoiding paying tax in India, will come into effect on 1 April 2015.

“Due to the ambiguity in the GAAR provisions, it was expected that detailed guidelines would be released. Unless the Government provides more certainty on the application of GAAR, it will result in significant litigation and negatively impact investor sentiments,” local law firm Nishith Desai said in a report following the budget announcement.

“We were clearly hopeful of, and expecting, more clarity around the tax liabilities for foreign investors [in private equity], so to that extent I think clearly there was more expected out of this budget,” one local GP told Private Equity International.

“I would have thought there would be a greater incentive for the government to attract long-term capital and therefore give greater tax benefits to long-term investors.”

However, there is hope that finance minister Arun Jaitley will be offering more information to the industry on these matters in due course, Dhanpal Jhaveri, chief executive of Everstone Capital Partners, explained.

“GAAR hasn’t been touched upon at all in the budget, they’ve specifically said they would deal with it separately and want to look at all the implications before they decide when to implement GAAR,” he told PEI.

“Directionally, [Jaitley] has made all the right noises in terms of retrospective tax, creating a stable tax regime – so [that] there is more definition around what does and does not get taxed. So I think all those are the right statements, but it remains to be seen how that gets translated in the final print.”

Moreover, it is unclear why the budget has so clearly addressed concerns of real estate and infrastructure investors, but leaving private equity funds in the dark about how they will be impacted by impending tax laws.

The government has instated a “pass-through” for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), allowing foreign investors to more freely participate in real core asset investment in India.

“There has been a very clear focus on attracting foreign investment in the real assets and infrastructure space,” Jhaveri commented.

However, he also explains that while GAAR remains ambiguous, the government has brought in other measures to improve the lot of private equity firms in India.

For example, the methods by which foreign investors can calculate valuations for their portfolio companies when they exit have now been aligned with international best practices (previously done using relatively archaic methods) and no longer require the approval of the Reserve Bank of India before the sale. This increases India’s competitiveness in terms of producing out-sized returns for investors.

Moreover, the government has committed to maintaining the fiscal deficit target at 4.1 percent, “a big positive”, according to Jhaveri, demonstrating they are serious about managing the government’s finances.

He concludes, “Broadly, the big factors [have been] focused on managing fiscal deficit and attracting investment in the real estate and infrastructure sector and overall I would say trying to [address] investors’ concerns around the tax regime, [which] we expect will be translated into more specific notifications and regulations.”