Investment Arms Of Sovereign Funds May Get Tax Exemptions For Infra Investments Too

In an effort to attract foreign investment, especially long-term in nature, to fund the Rs 103 lakh crore National Infrastructure Pipeline, Finance Minister Nirmala Sitharaman has offered a 100 percent tax exemption on the returns that such investment would earn, be it equity or debt. This is only available to sovereign wealth funds, namely Abu Dhabi Investment Authority as well as any entity wholly owned and controlled, directly or indirectly, by a foreign government.

While the Finance Bill mentions that official notification will list eligible funds, the criteria it lays down cover conventional SWFs such as Norway’s Government Pension Fund Global with $1.2 trillion in investments as also Singapore’s Temasek—an investment fund with a $313-billion portfolio. Underscoring this point, a government official said on condition of anonymity that investment vehicles of sovereign wealth funds registered as foreign portfolio investors in India will also be allowed to avail the tax exemptions. For instance, the investment vehicles of the Public Investment Fund of Saudi Arabia and Mubadala Investment Company of UAE can also write to the government showing their willingness to invest in a project and the application will be processed by the finance ministry.

To be clear:

Sovereign wealth funds like GIC Pvt. Ltd., Kuwait Investment Authority, Temasek Holdings, Alaska Permanent Fund Corporation, Hong Kong Monetary Authority Investment Portfolio and SAFE Investment Company would benefit from the tax exemptions if they meet the eligibility criteria, and are notified by the central government for the purposes of such benefits, said Bhavin Gada, a partner at law firm Economic Laws Practice.

The proposed amendment gives freedom to sovereign wealth funds to invest through incorporated entities rather than investing directly, said Amit Singhania, partner at law firm Shardul Amarchand Mangaldas & Co.

Sovereign funds, that wish to invest in an infrastructure project and avail the tax exemption, will have to write to the finance ministry along with details of the project they have identified for investment, the government official said. The application of the sovereign wealth fund will be processed by the Department of Revenue on a case-to-case basis, and these funds will be notified for exemption under Section 80-IA of the Income Tax Act, he said.

The investment incentive is a tax exemption on dividend, interest or long-term capital gains arising from a debt or equity investment made in a “company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating or maintaining any infrastructure facility” as specified by the law. The infrastructure projects will include:

• A road, a bridge or a rail system.
• A highway project including housing or other activities being a part of the highway project.
• A water supply project, water treatment system, irrigation project, sanitation, and sewerage system or solid waste management system.
• A port, airport, inland waterway, inland port or navigational channel in the sea.

The investment needs to have been made before March 31, 2024 and held for at least three years. A hundred percent deduction for any profits and gains from an investment will be available for 10 consecutive years, according to the Finance Bill.

Further rules and guidelines for investors to avail the tax incentives will be notified after the Finance Bill is passed by Parliament, the official said.

The National Infrastructure Pipeline was drawn up by a task force in December last year and includes projects that stretch from 2019-20 to 2024-25. These projects have been identified in sectors such as energy, roads, railways, ports and airports, digital infrastructure projects, mobility projects, irrigation, rural, agriculture and food processing. Projects worth about Rs 25 lakh crore have been identified in the energy sector followed by road projects worth Rs 20 lakh crore.