India has substantially liberalised the tax framework to extend exemption to fund houses owned by a single institutional entity, a move aimed at attracting offshore fund management activity into the country.

The Central Board of Direct Taxes (CBDT), the apex direct taxes body, has announced rules to implement the new regime that kicks in from April 1.

The notification has inserted a new rule 10V in the Income-tax Rules, providing the regulatory framework within which the scheme of section 9A relating to such entities will operate.

"The CBDT has issued operating rules governing Section 9A of the I-T Act, which provides for special taxation regime with effect from 01.04.2016 to facilitate location of fund managers of offshore funds in India," CBDT said in a statement on Wednesday. It also introduced an optional pre-approval mechanism which will work like an advance ruling, allowing such fund managers to get clarity on tax liability before starting operations.

Under this mechanism, the fund can approach the CBDT to determine whether it has met the prescribed conditions and once the board grants approval, tax benefit cannot be denied to the fund by the tax officer.

Central Board of Direct Taxes eases tax framework to attract offshore fund houses

These rules have relaxed the harsh conditions imposed by Section 9A. For instance, a fund owned by a single institutional entity will now also be eligible for tax exemption and a lookthrough provision has been introduced to determine whether the condition of having 25 members has been met.

Besides, if a transfer pricing adjustment is made on the remuneration paid to the fund manager this by itself will not debar the fund from claiming the tax benefit even though Sec 9A had stated that the fund should pay an arm's length remuneration to the fund manager.

The condition of having broad-based unrelated investor pool will be relaxed for first 18 months and at time of winding up of fund.

"These changes are welcome and not only remove some of the impractical conditions imposed under 9A but also provide an atmosphere of certainty to the fund from a tax perspective," said Rajesh Gandhi, partner-tax, Deloitte Haskins & Sells LLP.