Budget 2021: Sovereign, pension funds get further boost to invest in infra

Budget 2021: Sovereign, pension funds get further boost to invest in infra

Budget 2021: Sovereign, pension funds get further boost to invest in infra
Kalpesh Desai and Nirmal Nagda

Development of infrastructure is the backbone of economic growth and stability of any country. The government of India (GOI) has taken several steps to meet huge funding requirements of the sector. 

To attract long-term patient investors, Finance Act 2020 provided tax exemption to notified sovereign wealth funds (SWFs) and pension funds (PFs) for specified income earned on investments in specified infrastructure sectors, subject to conditions. 

Direct investment in infrastructure entities or in units of alternative investment funds (AIFs) or infrastructure investment trusts (InvITs) are allowed. 


While this was a welcome move, the funds faced significant challenges in satisfying some conditions and this is evident from the fact that only one SWF has got notified. 

Taking cognisance of the issues and industry representations, the GOI vide Finance Bill 2021 has proposed measures to provide further thrust to their investments. 

One of the most important things was to allow SWF/PFs to invest in India through a special purpose vehicle (instead of direct investment) to ringfence their liability. 


It is now proposed to allow SWF/PFs to invest through a domestic holding company which is set up after 1 April 2021 with a minimum 75% investment in eligible infrastructure entity. 

While this amendment could provide some cushion, SWF/PFs would have been more comfortable having a holding company in their home jurisdiction. 

Further, it is unclear whether the legislators intended the domestic holding company to be their wholly owned subsidiary, but the proposal seems to suggest a mere requirement of a domestic company without specifying the extent of shareholding or ownership. 


Further, if the holding company is only making investments, it could also be required to register as an NBFC/core investment company.  

In the absence of any specific tax exemption at the holding company level, any tax outflow would impact the rate of return for SWF/PFs. To elaborate, the holding company would be liable to pay capital gains on exit from the infrastructure entity.  

With respect to back-to-back dividend, there may not be additional tax outflow owing to deduction under Section 80M (presumably no minimum alternate tax if the holding company has opted for the new lower corporate tax regime). However, there would be tax lockup due to taxes withheld by the infrastructure entity. 


With respect to interest, there could be tax leakages due to thin capitalisation provision. Additionally, there could be a lock-up due to tax withheld by the infrastructure entity.  

Currently, tax exemption on SWF/PF investment in AIF is available only if AIF makes 100% investment in eligible infrastructure companies. This provision is proposed to be relaxed by granting exemption even where AIF invests at least 50% in infrastructure entities or in an InvIT. 

Furthermore, exemption has been extended to investments in infrastructure finance company (IFC) or infrastructure debt fund-NBFC (IDF) which has at least 90% lending to infrastructure companies. 


The consequential proposal is to allow tax exemption on a proportionate basis. These proposals are favourable and have widened investment opportunities. 

The mechanism for computing proportionate exemption where less than 100% investment is made by the holding company, AIF, IFC or IDF is proposed to be prescribed separately. 

While an AIF is passthrough and it could have been possible to compute the appropriate exemption even otherwise, with respect to investment through holding company, IDC or IDF, this could be of significance.  

There is also some ambiguity in terms of manner and point of time for computing the investment limits (75%/50%/90%) and, therefore, GOI should clarify these aspects.

Another welcome move is relaxing some onerous conditions: 

  • Currently, SWFs cannot undertake any ‘commercial activity’ within or outside India. The term commercial activity was not defined and hence the ambiguity. It is now proposed to place the condition that SWFs shall not participate in day-to-day operations of the investee entity.  
  • It is proposed to allow SWF/PFs to borrow/take loan, provided that the borrowings are not made for the purpose of making investment in India.
  • PFs are proposed to be eligible to claim exemption where they are ‘liable to tax’ in foreign country, even where subsequent tax exemption is provided.

Having said the above, some aspects remain unresolved. For example, tax lock-up in the hands of SWF/PFs due to applicability of withholding tax on interest earned on debt investment in eligible companies (through FPI route or vide loan agreement). 

Withholding tax would also apply where dividend is distributed by InvIT (assuming underlying SPV has not opted for a concessional tax rate regime).   

While the overall move has been positive, providing further clarity and addressing above issues will go a long way in attracting the much-needed capital from SWF/PFs to develop the infrastructure sector at the desired pace.

Kalpesh Desai is partner, M&A and PE tax, KPMG in India, and Nirmal Nagda and Mugdha Godbole are chartered accountants 

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