| |

Tax Parity for IFSC Funds to Help HNIs Avoid US Inheritance Levy

Wealthy Indians, betting on Wall Street, can use a fund vehicle GIFT City to escape the US inheritance tax-an unforeseen liability linked to offshore investments that many resident investors or their heirs are unaware of. However, such fund pooling entities-akin to regular mutual funds – formed in India’s financial centre for outbound investments by high net worth individual (HNI) investors, can take off only after New Delhi sets right an uneven tax law. The International Financial Services Centres Authority (IFSCA), the unified regulator, is knocking on the government’s doors to put regulated fund pooling and investing entities set up in GIFT City on an equal tax footing with domestic mutual funds.

Unlike the tax regime for Sebi-registered domestic MFs, where investors (and not the fund) pay tax on the dividend received or capital gains booked on redemption of units, tax is applicable at the fund level (and not in the hands of investors) for funds set up in GIFT City.

Such regulation is a deal-breaker for fund houses and asset management companies planning to set up shop in GIFT City to attract HNI money for outbound investments. Why? First, the tax rate (at the fund or MF trust level) could be significantly higher than what domestic MF investors pay; second, the post-tax net asset value (NAV), which reflects the market value of the securities held by a such a pooled investment scheme, would be lower-making it less attractive for long-term investors who are devotees of compounding. Despite not having redeemed any their units, such investors have of to settle for a lower NAV once some other investors exit the fund.

TAX LIKE DOMESTIC MFS

However, if the tax regulation for pooled investments in IFSC is brought on a par with local fund houses, then resident investors selling units would pay 10% or 15% tax depending on whether the capital gains are long term or short, and shell out tax on dividends distributed, according to the tax slabs they fall in.

Many rich investors, looking to diversify their bets, use the Reserve Bank of India’s liberalized remittance scheme which permits a resident individual to transfer up to $250,000 a year overseas to hold bank accounts and buy stocks, listed debt, and properties. However, several investors having exposure to markets like the US, are oblivious to the fact that in the event of their death, their heirs would have to shell out inheritance tax to the US government if the value of the assets crosses $60,000 (about *50 lakh) a threshold which is far lower than the investments of many HNIs under LRS. Failing to pay the inheritance would be construed as a violation of US laws.

Understandably, such investors, putting money in overseas securities, could prefer a fund pooling and investing entity in the GIFT City to route their investments to the US. Instead of directly investing in US securities, a vehicle in GIFT would shield them from inheritance tax as jurisdictions like the US impose the tax even on non-citizens. Such investments into a GIFT fund by a resident investor would be counted as LRS and categorized as overseas portfolio investment (OPI).

“These pooling and investing entities in GIFT City would offer other ad- vantages: provide a well-regulated avenue to investors to get exposure to companies not present in India such as Nvidia, Alphabet, Amazon and Meta; second, it would stem the outflow of fees to foreign fund managers based in Singapore, Hong Kong etc. Also, it ensures that Indian money remains managed by regulated Indian fund managers,” said Hitesh Gajaria, senior advisor at KPMG.

BROAD-BASED FUNDS BETTER THAN FAMILY OFFICES

It is widely felt that regulators and the government could prefer such tax parity in enabling investments by residents in a broad-based mutual fund in GIFT City for outbound investments to letting the Richie-rich set up foreign family offices or family investment funds in GIFT to move money out of the country or make large investment in properties abroad. “Currently, there is no specific tax regime for GIFT City-based retail schemes (which otherwise exists for ‘specified funds like category-3 funds). A possible model could be to deduct taxes at the fund level at the time of distribution by the fund, or redemption by an investor Given that a retail scheme by design is in- tended to attract a wider investor base, this approach could help stream- line the process,” said Richie Sancheti, founder of the law firm Richie Sancheti Associates.

S-ET Image Source: Google

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *