As the Union Budget 2025 approaches, foreign sovereign wealth funds (SWFs) and pension funds are lobbying for an extension of the tax exemption on their investments in India's infrastructure sector. The current tax benefit, granted under Section 10(23FE) of the Income Tax Act, is set to expire on March 31, 2025. Industry experts and stakeholders are calling for a three-year extension to sustain foreign capital inflows into this critical sector.
Key Aspects of the Tax Exemption
- Scope of Benefits: Section 10(23FE) exempts income such as dividends, interest, and long-term capital gains from infrastructure investments made by notified SWFs and pension funds.
- Investor Impact: The regime has attracted marquee players, including the Abu Dhabi Investment Authority (ADIA) and Canada Pension Plan Investment Board (CPPIB), to invest heavily in Indian infrastructure projects.
Why the Extension Matters
Without a continuation of these benefits, sovereign wealth funds will be taxed at rates applicable to other offshore investors. Experts caution this could deter foreign investments, particularly given the weakening rupee and softer market conditions.
"India needs to maintain its competitive edge to attract long-term patient capital for infrastructure development. Extending this tax exemption is not just desirable but necessary," said a leading industry expert.
Industry Recommendations
- Three-Year Extension: Extending the sunset clause beyond March 31, 2025, would provide clarity and confidence to investors.
- Broadening Exemption Scope: Current exemptions apply only to domestic platforms. Experts suggest expanding eligibility to offshore platforms, where SWFs often pool funds for consortium-based infrastructure investments.
- Clarification on Indirect Transfers: Tax provisions triggering gains on indirect transfers through offshore entities should also be addressed to ensure long-term capital gains exemptions for SWFs and pension funds.
Broader Implications
The infrastructure sector is pivotal to India’s growth trajectory, and sustained foreign investments are crucial to meeting the nation’s development goals. A failure to extend these exemptions could risk slowing down much-needed capital inflows.
“Extending and expanding the scope of these incentives will reinforce India’s position as an attractive investment destination, particularly for sovereign and pension funds looking for stable, long-term returns,” another tax expert noted.
The Union Budget 2025 is anticipated to provide much-needed clarity on this issue. Will the government heed the industry’s call to keep India’s infrastructure sector globally competitive? The answer may shape the future of foreign investments in the country.
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