PAN exemption for non-residents investing in IFSC based Category I and Category II AIFs

The Central Board of Direct Taxes (CBDT) has granted a much-awaited wish of investors and fund managers mulling over at starting operations in International Financial Services Centre (IFSC) at Gujarat International Finance Tec-City (GIFT City). The newly inserted Rule 114AAB, notified vide the Income-tax (19^th Amendment) Rules 2020 (Rules) exempts all (i) non-residents (except for a company) and (ii) foreign companies (together referred to as ‘Non-Resident’) from the mandatory requirement of obtaining the permanent account number (PAN).

A Non-Resident, who has, during a previous year, made investment in an alternative investment fund (AIF) located in IFSC and is registered as a Category I AIF or Category II AIF, shall not be required to obtain PAN from the income tax authorities, if the following conditions are met:

Further, section 206AA (that mandates the requirement to furnish PAN) would also not apply to payments made to a Non-Resident, by virtue of the exemption granted to it under Rule 114AAB.

IFSC based Category I AIFs and Category II AIFs would be required to furnish a quarterly statement laying down the aforementioned details and documents received by it from Non-Resident investors, within 15 days from the end of the quarter of the financial year, as per the specified procedures, formats and standards.

A step closer towards “onshoring the offshore”?

Non-residents earning income from IFSC based AIFs (CBDT Notification No. 55/2019 dated 26 July 2019) already enjoy an exemption from filing income tax returns in relation to such income. This newly introduced PAN exemption for specified Non-Residents investing in IFSC based Category I AIFs and Category II AIFs certainly makes GIFT City more attractive as a fund destination for non-resident investors looking to invest in India. This move will now facilitate offshore investors to directly pool capital in the IFSC based AIFs, instead of coming through an offshore feeder fund. Further, feeder funds may relocate to IFSC, with their operations directly being controlled by offshore fund managers. Offshore fund managers may also use IFSC based AIFs as feeder funds to invest in offshore funds. This exemption for Non-Residents certainly acts as a pertinent milestone in the journey of GIFT City as an IFSC, to emerge as a fortified financial services regime for investment funds, globally.

-       Siddharth Shah (Partner) and Ishita Khare (Associate)

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