Mumbai
The potential impact on investments from sovereign wealth funds (SWFs) and pension funds looms large as the deadline for the sunset clause extending tax benefits to such funds approaches with this year’s Budget.
The government initially incentivized such funds by granting them tax exemptions on income derived from dividend, interest, and long-term capital gains from investments in specified infrastructure businesses through Budget 2020, applicable until March 31, 2024.
“This move had a significant positive effect on India, attracting a considerable amount of investments from these funds. Furthermore, the UAE and Saudi Arabia expressed interest in substantially increasing their investments in India,” said SR Patnaik, Partner and Head – Taxation, Cyril Amarchand Mangaldas.
Last year, the government extended the sunset clause by a year, until March 31, 2025.
According to Patnaik, the market for SWFs and pension funds in India is still developing, presenting ample opportunities for further investments in the country. It is therefore crucial for the government to consider extending the sunset clause by another year, at the very least.
“Many funds have already taken advantage of this exemption, and a continuous flow of additional funds will be required for these investments. Given the pivotal role infrastructure development will play in propelling India to a $26 trillion economy, it is hoped that this exemption will be extended for further investments,” said Keyur Shah, Tax Leader – Financial Services, EY India.
Experts believe that these tax exemptions have provided a significant boost to the infrastructure sector in India. Global sovereign wealth funds increased direct investments in India to $6.71 billion in 2022 from $3.79 billion in 2021, according to the Sovereign Wealth Fund Institute. Moreover, towards the end of 2023, the UAE and Saudi Arabia announced their intentions to invest $75 billion and $100 billion, respectively, in India.
Bijal Ajinkya, Partner at Khaitan & Co, pointed out that gains from unlisted bonds and debentures are currently treated as short-term capital gains regardless of the holding period. This may deter investments from SWFs and pension funds that rely on exemptions for long-term capital gains.
“Exempting such funds from gains on debt instruments would be essential to ensure the sustained interest of SWFs in investing in India’s growth story,” she added.
In the previous year’s Budget, the government did not extend the sunset clause applicable to newly established manufacturing companies, which were eligible for a concessional tax rate of 15 percent. Similarly, in 2023, the concessional tax rate of 5 percent on interest income from rupee-denominated bonds for foreign portfolio investors was not extended.
Published on January 20, 2025
