India-focused funds are planning to route their funds through Singapore to escape higher tax liability after the Union budget removed some exemptions for those based in Mauritius, according to a Mint report.
The shift has been prompted by the budget levying indirect transfer provisions on category II foreign portfolio investors such as those routing their investments through Mauritius, it added.
Mauritius accounted for Rs 4.37 lakh crore worth of portfolio investments into India last year. Shifting to Singapore will ensure that category II FPIs are not saddled with higher tax liability as the city state is still exempt from indirect transfer provisions, the report cited three unnamed fund managers as saying. The removal of exemptions will mean that investors in category II FPI funds have to pay capital gains tax on indirect transfer of shares or other assets, it added.
While a majority of foreign funds were exempted from indirect transfer provisions in 2017, the Finance Bill of 2020 has removed exemptions for category II FPIs, which include hedge funds, and funds that are set up in countries not compliant with the Financial Action Task Force (FATF) norms to combat money laundering and terror financing, the report said. Mauritius is not an FATF jurisdiction.
“We are actively trying to change the structure of our $200 million fund. We are trying to find an asset manager in Singapore or get a majority of our investments to be routed from Singapore. In these two scenarios, we will fall in category I," Mint report quoted an India-focused fund manager as saying, one of the three cited earlier.