As published on economictimes.indiatimes.com, Thursday 2 July, 2020.
A number of foreign portfolio investors in the country are looking to move their assets from Hong Kong to Tokyo on reports of the government’s move to regulate Chinese investments and China’s imposition of national security law.
Many FPIs and their custodians have reached out to tax experts to understand how the India-Japan tax treaty fares against the India-Hong Kong one, people close to the development told ET.
These funds are concerned about the growing anti-China sentiment in the country and the government’s increasing reluctance to do business with China in the aftermath of the deadly clash in Galwan Valley, where 20 Indian soldiers were killed, and the ongoing border standoff, even as the status quo continues regarding their investments for now.
Many FPIs, which invest in India through Hong Kong-based pooling vehicles, have already been developing contingency plans to move out of Hong Kong after China imposed a strict national security law.
If they move to Tokyo, investments in India would be covered under the new tax treaty that may have certain advantages as against Hong Kong, tax experts said. But it would have its own complications.
“The Japan tax treaty with India is beneficial for investors that invest in derivatives and debt,” said Rajesh H Gandhi, partner at Deloitte India. “This treaty is on a par when it comes to taxation of capital gains from sale of equity shares and exempts sale of derivatives and debt from taxation,” he said.
A senior executive at a custodian bank that deals with some FPIs based in Hong Kong said Japan has emerged as a favourable destination due to its government’s stand. “Japanese government is promising many sops, like leeway in rent and liberal visa regime,” he said.
“The biggest worry for now is whether to entirely move operations to one country or split it between other countries, say like Singapore,” the executive said. This is where the tax treaties come into picture, especially with India as many funds have been allotting higher weightage to the country lately, he said.
Tax experts said FPIs could look at setting up offices in Japan through a multi-layered structure that gives blanket exemption from indirect transfer of shares and also have equal footing on capital gains under India-Japan tax treaty.
“As against India-Hong Kong tax treaty, the India-Japan treaty gives an added protection on indirect transfer of shares, especially when investment vehicles are structured in a two-tier offshore structure,” said Amit Singhania, partner, tax, at Shardul Amarchand Mangaldas. “This is a new dimension of the tax treaty which is being explored by investors post introduction of taxation of indirect transfers under the domestic tax law.”
Indirect transfer of share regulations provides for taxing overseas transactions of shares of Indian companies, provided the shares constitute more than 50% of the foreign fund’s total assets.
The government had in April changed its foreign direct investment policy whereby any investor from a country that shares a border with India would require special permission before investing in an Indian company.
This is applicable to Chinese investors investing in India directly or indirectly, through private equity or venture capital funds.
ET had first reported on April 27 that the government is considering if investments in listed firms by FPIs needed similar modification.
“There have been debates on this issue, but we are mindful that investment in FPI pooling vehicles is different. It may be unfair to penalise the whole fund if, say, one investor is from China,” said an official aware of the development. “That said, both Sebi and RBI have been asked to monitor data,” he said.