On 1 February 2018, India’s Finance Minister, Arun Jaitley, presented the Union Budget 2018 with a number of tax proposals for the Financial Year 2018–19, including an important change to the taxation of gains from the transfer of long-term capital assets (i.e. listed securities held for more than 12 months or unlisted securities held for more than 24 months). These changes have been incorporated into the Finance Act 2018 (which amends the (Indian) Income Tax Act) and have come into effect from 1 April 2018.
Until 31 March 2018, capital gains on the transfer of a short-term capital asset (i.e. listed securities held for less than 12 months or unlisted securities held for less than 24 months) were taxable in India at the maximum marginal rate of 16.38%, while those on the transfer of a long-term capital asset were exempt from taxation. Irrespective of the duration of holding, transfers of certain securities were subject to the levy of a Securities Transaction Tax (STT).
An amendment to the (Indian) Income Tax Act extends the scope of capital gain taxation to apply to gains on the transfer of a long-term capital asset. As a result of this amendment:
It should be noted that the tax on LTCG must be paid to the Indian tax authorities before remitting any sale proceeds outside India.
There have been no changes to the taxation of short-term capital gains.
In light of the aforementioned amendments, the tax implications for investments in India also need to be considered. While previously, irrespective of the country from which the investments were made, LTCG was exempt from taxation in India, the tax implications for investments into India going forward would depend on the relevant tax treaty with India. Investors from countries with a favorable capital gain provision in the relevant tax treaty may be able to avail of the treaty benefits. In all other cases, capital gains arising to investors resident in the respective countries will be impacted. This would be the case for Luxembourg investment funds (SICAVs and FCPs), which are not eligible to apply the Double Tax Treaty (DTT) between Luxembourg and India.
By way of an example, for funds investing in India through Mauritian entities, the DTT between India and Mauritius was amended, with effect from 1 April 2017, to provide that such gains would also be taxable in India. In relation to investments made prior to 1 April 2017, the previous exemption continues to apply to gains arising from the transfer of such investments. However, a transitional provision applies to the transfer of assets acquired on or after 1 April 2017, namely that the tax rate applicable would be 50% of the Indian tax rate for a period of two years, i.e. up to 31 March 2019, subject to the condition that the Mauritian entity meets the limitation of benefits conditions contained in the DTT.
While the amendments to the taxation of LTCG would not affect transfers made on or before 31 March 2018, the impact on securities acquired on or after 1 April 2017 and transferred on or after 1 April 2018 would be taxable at the maximum marginal rate of 10.92% of gains arising from the transfer of these securities.
In light of the changes mentioned above, investors investing in India should bear in mind that additional compliance will be required to ensure that the appropriate tax is paid in India, particularly for Luxembourg investment funds where no treaty benefits are available. This would entail (1) assessing the capital gains accruing at regular intervals, (2) ensuring that the relevant documentation is in place for the investment fund’s service providers in India, (3) accurately determining the tax liabilities and (4) ensuring that the equality of all investors in the investment fund is maintained by booking regular accruals on the Indian shares. In addition, investment funds are required to prepare and file their annual return of income and pay the appropriate tax.
The aforementioned changes are most likely to affect investment funds with a long-term investment strategy. It would therefore be prudent for such funds to assess the impact of these changes on their current investments in Indian securities.
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