Mumbai
Investments from sovereign wealth funds (SWFs) and pension funds could take a hit if the sunset clause extending tax benefits to such funds is not extended in this year’s Budget.
The government first incentivised such funds by providing them with tax exemptions on income earned by way of dividend, interest and long-term capital gains arising from investments in specified infrastructure businesses through Budget 2020. This was for investments made till March 31, 2024.
Flow of investments
“This move had significantly benefitted India as there was a large influx of investments by these funds. Further, the UAE and Saudi Arabia had suggested that they will substantially increase their investments into India,” said SR Patnaik, Partner and Head – Taxation, Cyril Amarchand Mangaldas.
Last year, the government extended the sunset clause by a year to March 31, 2025.
Market at nascent stage
According to Patnaik, the market in India for SWFs and pension funds is still at a nascent stage and there is a lot of scope for further investments into India. This makes it imperative for the government to extend the sunset clause by another year, at least.
“Several funds have already availed of this exemption and many of these investments would need additional funds on an ongoing basis. Given the key role infrastructure development will have in making India a $26 trillion economy, one does hope that this exemption is extended for further investments,” said Keyur Shah, Tax Leader – Financial Services, EY India.
Experts believe that these tax exemptions have provided a fillip to the infrastructure sector in India. Global sovereign wealth funds increased direct investments in India at $6.71 billion in 2022 versus $3.79 billion in 2021, according to the Sovereign Wealth Fund Institute. Further, during the end of 2023, the UAE and Saudi Arabia declared their intent to invest $75 billion and $100 billion, respectively in India.
According to Bijal Ajinkya, Partner at Khaitan & Co, gains from unlisted bonds and debentures are currently classified as short-term capital gains irrespective of the holding period. This may discourage investments from SWFs and pension funds that rely on long-term capital gains exemptions.
“Exempting such funds from gains on debt instruments would be imperative to ensure sustained interest of SWFs to invest in the India growth story,” she said.
Last year, the Budget did not extend the sunset clause applicable to newly set-up manufacturing companies, which enabled them to avail of a concessional tax rate of 15 per cent.
Similarly, in 2023, the government did not extend the concessional tax rate of 5 per cent on the interest income of rupee-denominated bonds given to foreign portfolio investors.
