PE industry awaits Indian tax reform

After a record-breaking year for private equity investment in India, global investors are hoping that the government will introduce a more predictable tax regime next week.

Ahead of the release of India’s Union Budget 2016 next week, the private equity sector is expecting the government to ease certain tax regimes based on economic reforms that have been introduced over the past few years, according to industry tax experts.

Private equity investment in India hit record levels in 2015, reaching $21 billion and surpassing the previous high of $18 billion seen in 2007, according to a KPMG blog post in the India Economic Times.

Since 2014, the government has introduced a series of initiatives aimed at easing the process of doing business in India, such as the relaxation of rules around the Foreign Direct Investment (FDI) policy in real estate and domestic funds and the launch of “Start-up India,” an initiative to promote bank financing for small ventures. These initiatives have increased the private equity industry’s expectations for the 2016 budget.

“Considering the positive tone set by the new economic reforms, global investors are also very hopeful of a competitive and predictable tax regime in India,” said KPMG tax partners Saumil Shah and Vikram Hosangady in the blog post.

Currently, taxation in India is subject to multiple interpretations and needs to be simplified and made more efficient, Girish Vanvari, partner and head of tax at KPMG in India told Private Equity International's sister title pfm.

In an attempt to fix issues with direct taxes, the government announced plans last year to gradually lower corporate tax rates from the current 30 percent to 25 percent over the next four years, alongside proposing to phase out the various incentives and tax holidays given to corporates.

This year, “the industry is waiting to see the outcome of lowered tax rates that were proposed by the government in 2015,” said Vanvari.

After an amendment was made in the Union Budget 2014 to treat income gained from the transfer of securities by foreign portfolio investors as capital, in this year’s budget, it is expected that similar benefits will be extended to alternative investment funds (AIFs) and private equity investors because they also make long-term investments.

The government is also expected to provide clarification around the indirect transfer tax provision, which covers any redemption, transfer and buyback of shares or units of foreign fund entities and special purpose vehicles that focus on India or derive value from Indian investments. Currently under the provision, foreign fund exits may face double taxation because the Indian investment may be subject to both Indian tax and transfer tax when the returns are distributed to the investors of the fund.

In addition, Shah and Hosangady suggest that the 10 percent withholding tax levied under current tax provisions should not apply to payment of income of an investor who is an AIF and that the government should introduce a benefit under the tax treaty to non-resident investors in the AIF.

The government is expected to present the budget, which will establish a roadmap for the next three years, on 29 February.