Direct Tax Alert - Eligible Foreign Investors (EFI) dealing in IFSC-listed securities exempted from obtaining PAN in India

Background:

  • The provisions of Section 139A of the Income-tax Act, 1961 (IT Act) to be read with Rule 114 of the Income Tax Rules, 1962 (IT Rules) deal with the requirement of application and obtaining of Permanent Account Number (PAN) in India.
  • In 2020, the Central Board of Direct Taxes (CBDT) inserted Rule 114AAB1 in the IT Rules to provide an exemption to non-resident investors/unit holders who earned income from investment in Alternative Investment Funds (AIFs) set-up in International Financial Service Centre (IFSC), from the requirement of obtaining PAN under section 139A of the IT Act, subject to certain conditions.
  • In order to avail this exemption, Rule 114AAB requires such non-residents to furnish certain details and documents to the AIFs, namely declaration containing name, address, country of residence and Tax Identification Number in the country or specified territory of residence.
  • Additionally, the AIFs are required to furnish this information through a quarterly statement to be filed electronically in Form No. 49BA.

Recently, the CBDT has issued a Notification2 amending Rule 114AAB of the IT Rules.

We, at BDO in India, have analysed and summarised this Notification hereunder

Amendment in Rule 114AAB of the IT Rules

  • The CBDT has amended the provisions of Rule 114AAB of the IT Rules w.e.f. 4 May 2021 so as to also include Eligible Foreign Investors (EFIs) who have undertaken transactions in foreign currency in capital assets referred to in Section 47(viiab) of the Act, listed on a recognised stock exchange located in any IFSC.
  • Section 47(viiab) of the IT Act provides exemption on transfer of any capital asset, being:
    • Bond or Global Depository Receipt
    • Rupee denominated bond of an Indian company; or
    • Derivative; or
    • Such other securities as may be notified by the Central Government.
  • Exemption from obtaining PAN will only be applicable if the following conditions are fulfilled:
    • EFI does not earn any income in India, other than the income from transfer of a capital asset referred to in Section 47(viiab) of the IT Act;
    • EFI furnishes the following details and documents to the stockbroker through which the transaction is made:
      • Name, e-mail id, contact number;
      • Address in the country or specified territory outside India of which he is a resident;
      • A declaration that he is a resident of a country or specified territory outside India; and
      • Tax Identification Number in the country or specified territory of his residence and in case no such number is available, then a unique number on the basis of which the non-resident is identified by the Government of that country or the specified territory of which he claims to be a resident.
  • Additionally, stockbrokers of EFI should furnish a quarterly statement with details and documents received by it as mentioned above in Form 49BA within 15 days from the end of the quarter of the financial year to which such statement relates to the appropriate authority.
  • Further, while Rule 114AAB of the IT Rules earlier covered only Category – I and Category – II AIFs located in IFSC, the amended Rule also includes Category – III AIFs located in IFSC. Accordingly, investors in Category – III AIFs in IFSC, which qualify as ‘specified funds’, will also be eligible to avail the exemption from obtaining PAN in India.

Our Comments:

As per the Operating Guidelines for Foreign Portfolio Investors as issued by SEBI in 2019, EFIs are those foreign investors who are not regulated by SEBI and are eligible to invest in IFSC by satisfying the following conditions:

a) The investor is not resident in India

b) The investor is not resident in a country identified in the public statement of Financial Action Task Force as:

  • A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
  • A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

c) The investor is not prohibited from dealing in a securities market in India.

The Notification brings EFIs at par with other investors that do not have a physical presence in an IFSC and are earning only tax-exempt income from their transactions in an IFSC, in terms of exemption from income-tax compliance requirements. This will reduce the compliance burden and will encourage EFIs to participate in securities listed on IFSC stock exchanges. Further, inclusion of investors in Category - III AIFs located in the IFSC under the purview of Rule 114AAB of the IT Rules is also a necessary and welcome move, in light of the amendment brought by the Finance Act, 2021 to Section 115UB of the IT Act granting pass-through status to Category – III AIFs located in an IFSC. The amendment to Rule 114AAB resolves uncertainties that could have been faced by investors seeking to invest in these AIFs, regarding their resultant compliance requirements in India.

The Notification is yet another step taken by the Regulators to incentivise investments in IFSC and relax the compliance requirements thereof, so as to boost investor confidence in IFSC.

1vide Notification No. 58/2020 (19th Amendment rules, 2020)

2Notification No. 42/2021 dated 4 May 2021

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