By Hiren Shah and Alpa Shah

The infrastructure sector in India has been one of the focus areas for India’s economic growth and overall development. The government has taken various measures to boost infrastructure and investments in the said sector. One of such initiatives, to boost investment in infrastructure sector, was by the introduction (by the Finance Act, 2020) of an exemption provision by way of section 10(23FE) to the Income-Tax Act, 1961 (the Act).

The said section provides income tax exemption to specified funds, namely Abu Dhabi Investment Authority (subject to satisfying specified conditions) and other Central Government notified Sovereign Wealth Funds (SWFs) and Pension Funds (PFs), for certain income arising from investment made by it in India in debt or share capital or unit.

To reflect on the impact, it may be worthwhile to note that SWFs have increased their direct investments in India to US$ 6.712 bn in 2022 versus US$ 3.797 bn in 20211. This demonstrates significant growth in the investment in India by SWFs over the short period of time and it has been an important source of finance to assists infrastructure development of the country.

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Riding high on the wave of the global positive sentiment associated with Indian economy, the recent interim budget, while offering no changes in existing tax rates, announced an extension of the tax exemption under section 10(23FE) of the Act, for investments made by the specified funds including, SWFs and PFs. As per the extension provided to section 10(23FE) of the Act, income (in the nature of dividend, interest, long-term capital gains, etc.) from investments made by SWFs and PFs in India up to 31 March 2025 would now be exempt as against such income from investments made up to 31 March 2024.

The move underscores the government’s commitment to fostering a thriving investment climate for incentivizing investments in India in the infrastructure sector, amongst others, by the SWFs and PFs.

Having laid the backdrop, we would now like to touch upon the income-tax nuance involved while availing the said exemption. One of the important conditions to avail the tax exemption by the SWFs and PFs under section 10(23FE) is that the SWF/ PF should be notified through the official gazette. Currently, around 35 SWFs/ PF have been notified by the government.

The notifications issued to the SWF/ PF indicate that they would be treated as specified fund for eligible investments made on or after the date of publication of the notification and before 31 March 2024. Now, with the extension of investment period, if the eligibility of the SWFs and PFs to qualify as ‘specified funds’ is not updated for the period up to 31 March 2025, the extension of investment period in the section may be restricted to only funds which would now be notified. Hence, to meet the requirement of the section, the earlier issued notification needs to be amended to include the extended period up to 31 March 2025, so that the already notified SWF/ PF can also avail the benefit.

To ensure smooth transition and to repose confidence, it would be beneficial if the government, suo moto, issues clarification that the already notified SWFs / PFs would be eligible to claim income-tax exemption in respect of investments made during the extended period of financial year 2024-25.

Alternatively, SWFs/ PFs also can approach the government for a clarification/ extension. Although this is doable, it may consume time and effort for the government as well as the specified funds.

Considering that the government has made its intention implicit to provide extension of tax benefit to SWFs and PFs, by extending the period of investment in section 10(23FE), it would be useful if the clarification is issued upfront by the government in order to lay down a clear path for the investors.

(Hiren Shah is Executive Director, Deloitte Haskins and Sells LLP, and Alpa Shah is Senior Manager, Deloitte Haskins and Sells LLP)

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