India must go Hong Kong way to lure investors: Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital
Not only do Indians manage global investors’ money that is invested in India, Indian nationals often hold positions of responsibility in funds that have nothing to do with India. Now, given the rapid advances that have been made in technology, why aren’t these Indian nationals residing in India?
Clearly, some of them have made a conscious decision to live in the global financial capitals, but like their counterparts in the IT profession (who manage the data centres of Fortune 500 companies from offices in Bangalore and Delhi), many Indian fund managers actually want to live in India but can’t do so because of our tax laws.
Currently, a fund manager who is based in India and also taking investment decisions for an offshore fund could create a Permanent Establishment (PE) for the offshore fund in India.
Hence, there is a risk that the profits of the offshore fund could be potentially subject to tax in India. Such a tax risk makes it unviable for global fund management houses to locate their top investment personnel in India. As a result, India loses out on the opportunities that the sheer size of the multi-trillion dollar global fund management industry presents in terms of jobs, GDP and income tax accruals to the Indian exchequer.
Countries with successful fund regimes either have an explicit tax exemption for offshore funds (e.g. the US, the UK, Singapore, and Hong Kong) or have refrained from taxing the funds even if the funds are managed from other countries. Some countries (the US, the UK, Hong Kong, Japan, etc) in fact have rules that exempt fund managers from creating a taxable presence for the offshore funds. In this regard, Hong Kong’s case study is instructive.
Prior to 2005-06, there was no law in Hong Kong exempting tax offshore funds that were, in practice, managed from Hong Kong. In 2005, Hong Kong introduced an offshore funds exemption and a provision in domestic law specifying that qualifying offshore funds would not be taxed in Hong Kong, even if they were managed from Hong Kong (the Offshore Funds Exemption).
Assets under the management (AUM) of Hong Kong fund managers in the year to December 31, 2007, went up 57% after the implementation of the Offshore Funds Exemption on March 1, 2006. Rapid growth was also reported in hedge funds.
There was a 90% increase in hedge fund AUM in the year to March 31, 2007, and a further 41% jump in the year to March 31, 2008. Over 98% of the hedge fund investors are non-Hong Kong residents.
Hong Kong’s experiences show the powerful role tax concessions can play in attracting investment managers. It is not unrealistic to assume that similar concessions would have comparable effects in India. In India, under current tax law, a provision can be inserted in the domestic law exempting offshore funds from taxation in India, even if their funds are managed from India.