FPIs looking to move shops to Singapore to escape high taxes after budget proposal

Mumbai: Foreign portfolio investors (FPIs) from Mauritius and the Cayman Islands are looking to restructure their pooling vehicles and registering new entities in Singapore to hold Indian stocks, after New Delhi proposed to change the rule to tax indirect transfer of shares.

These FPIs are considering first exiting all investments and then buying those back through entities registered in Singapore, said people in the know. The FPIs have informed their investors about the options that they are considering, the people said.

In the budget unveiled on February 1, the government said only those registered under the Securities and Exchange Board of India’s Category-1 scheme would be exempt from tax here. Category-1 funds comprise foreign portfolio investors and fund managers that are from countries compliant with the Financial Action Task Force (FATF) rules, such as Singapore. Category-2 investors largely comprise funds from Mauritius or the Cayman Islands. The exemption was earlier available to both categories.

The change means, Category-2 FPIs could end up paying tax of as much as 40% on their returns from transfer of shares — 10-20% on long-term and 30-40% on short-term capital gains. But, they can get upgraded to Category 1 if they comply with certain conditions, such as shifting to a FATF-compliant jurisdiction.

Many FPIs also explored the possibility of moving fund managers from Mauritius and the Cayman Islands to locations like Singapore, instead of setting up new entities. But merely tweaking the structure could lead to them being penalised under the General Anti-Avoidance Rule (GAAR), they fear.

“Many Category 2 FPIs, which have a dominant India exposure, might be exploring to move to a FATF jurisdiction such as Singapore to get a Category 1 status though the process of setting up a Singapore fund would be time consuming and costlier. Moving only the investment manager to a FATF country can also enable the fund to get a Category 1 status, but one needs to examine the GAAR risk of having the fund and fund manager in different jurisdictions,” Deloitte India partner Rajesh H Gandhi said.

Tax experts said the fear of GAAR was leading several FPIs to look at various options. The tax department can trigger GAAR in any situation where it suspects a particular decision — like moving a fund manager to Singapore from Mauritius — was taken only to reduce the tax outgo.

“While merely moving fund managers to FATF-compliant jurisdictions for FPIs from countries such as Mauritius could lead to GAAR ... there is a hope that the government will not do so. Many FPIs may look to start a new FPI from Singapore and transfer the holdings from a non-compliant FPI to Singapore. However, this could expose them to market fluctuations,” said Amit Singhania, a partner at Shardul Amarchand Mangaldas. “Moving the fund managers seems to be more efficient and seamless.”

Many of the FPIs that are looking to move base completely are owned by Indian firms, said people in the know. “Most of the investors in these FPIs too are Indians, and they would now have to first sell their exposure to India, and then buy the same shares through another vehicle registered from Singapore,” said one of the people. This strategy may lead to some cost as the selling and buying price of the same stocks may vary, but would still be less than the taxes payable in absence of such a strategy.

“The fear is that taxation under indirect transfer of shares or GAAR could have a huge impact,” he said. “Compared to that, this route (of setting up a new FPI) may not be as costly.”