Mumbai and Ahmedabad get push as global finance centres with new norms on permanent establishment

New norms on permanent establishment (PE) announced in the Budget will be applicable to all funds — regardless of whether they have raised funds in India or plan to deploy capital in the country — potentially boosting prospects of cities such as Mumbai and Ahmedabad with ambitions to emerge as global finance centres. But, there are irritants, notably the super-rich tax introduced in the Budget, which stipulates higher tax rate for those earning above Rs 1 crore as well as, what some analysts say, are ambiguities in the language of the new norms. In his Budget speech, Finance Rules on Permanent Establishment Give Fin Hub Plans a Fillip Minister Arun Jaitley had said the current taxation norms discouraged fund managers from locating to India. The Budget sought to change this in line with the government's keenness to attract high value financial services to India by clarifying that the physical presence of fund manager would not result in the creation of a PE.

"..A mere presence of a fund manager in India would not constitute permanent establishment of the offshore funds resulting in adverse tax consequences," said Jaitley. Many analysts say this is a step in the right direction though fund managers are not exactly queueing up to relocate to India. The initial impact could be on India-centric funds that have raised capital globally. "You would see superannuation funds, mainly from North America, taking advantage of this, as they have been bullish on India for some time," said Dinesh Kanabar, tax expert and CEO of tax advisory firm Dhruva.

Mumbai and Ahmedabad get push as global finance centres with new norms on permanent establishment"But the ambiguity around tax regulations had stopped them from appointing a manager in India. Apart from this, other funds would adopt a wait-and-watch approach for some time," he said. A major fund is all set to post a fund manager in Mumbai in 30-45 days, people close to the development said.

"For the funds to actually move their teams to a place, a whole ecosystem is required. We see that happening within the next 12-months. While many mutual funds, superannuation funds and private equity funds have shown initial interest, we think that concrete decisions would be taken by them only after the government notifies the rules and CBDT (Central Board of Direct Taxation) comes out with precise regulations," said Ramakant Jha, managing director and group CEO, Gujarat International Finance Tec-City, an up and coming finance centre outside Ahmedabad, which seeks to compete with Mumbai and eventually with the likes of Dubai and Singapore. Jha said that the government is also working towards establishing conflict resolution centres in GIFT, which would attract funds with global operations. In particular, the tweaks to the PE norms are intended to entice funds raised and deployed outside India.

"There is no tax on them. That is a no-brainer," said Sudhir Kapadia, national tax leader, Ernst & Young. "Going ahead, we can see that finance centres like the GIFT city in Gujarat or in Mumbai would compete with global cities. But the ecosystem has to be created where a hedge fund or other funds find it easier to operate. It could help if, like Singapore, India's CBDT, too, can give individual rulings around taxation," said Kapadia.Source:http://economictimes.indiatimes.com