Save Tax With Wealth Funds

India needs huge investments in its ailing infrastructure and the government is doing whatever it takes to make it attractive for global investors to participate. India is expected to be the world’s third-largest construction market by 2022 and will require an investment of over $770 bn in the infrastructure sector for sustainable development (ibef.org).

Budget 2020 gave a tax relief of 100 per cent exemption for Sovereign Wealth Funds (SWF) on passive incomes--interest, dividends and capital gains-- earned from investment in infrastructure and other notified sectors. All investments made on or before March 31, 2024 are eligible for this tax relief provided, they are held for a minimum period of three years. Given the present scenario, the time limit for investment is likely to be extended by a year or two.

These government-backed wealth funds are the National Savings Certificate (NSC), Sovereign Gold Bond Scheme (SGB) and National Infrastructure Investment Ltd. (NIIF) (Category-II AIF).

India’s domestic savings saw a gradual fall from 36 per cent in 2007-08 to just over 30 per cent during fiscal year 2019. Hence, the need for long-term external capital on benign terms is felt now.

To give a perspective, a SWF is a state-owned pool of money with a mandate to invest in diversified financial and developmental assets with the dual objective of betterment of societies as well as earning a passive income. The National Investment and Infrastructure Fund (NIIF) is involved in infrastructure financing.

Globally, major SWFs held nearly $8.2 trillion of assets in 2019 (SWFI). However, it is reported that the present holding of SWF has drastically reduced to $2.6 trillion, thanks to COVID. Some of the top-ranking SWFs are:

• Government Pension Fund Global (Norway): $1 trillion +
• Chinese Investment Corporation: $940bn
• Abu Dhabi Investment Authority (ADIA): $745 bn

SWFs are traditionally passive, long-term investors. They invest in a wide range of assets classes including government bonds, equity and FDI. India has been one of the top destinations for SWF investments garnering nearly 8 per cent of all deals happening in this space (2018-19 - SWFI). Some of the prominent investments made by SWFs in India include Rs 5,683 crore investment in Reliance Jio by ADIA and Rs 7,614 crore investment in GVK Power and Infrastructure by ADIA, Canada’s Public Sector Pension Investment Board and NIIF.

The scope of this exemption is not restricted to only core infrastructure like roads, bridges but has also been expanded to include sectors like transportation, logistics, energy, telecom, education, tourism, medical, affordable housing.

Even though these investments would, predominantly be in the unlisted space, the trickle-down effect is expected to be felt across facets:

• A one rupee investment in Infrastructure increases GDP by at least two rupees (S&P Global ratings) in India.
• A sustained inflow of long term global capital ensures a stable currency and keeps the inflation in check.
• The annuity flows from these investments could be bundled and listed as instruments with a fixed yield, thereby offering a hybrid option with proven annuity flows.
• Eventually the equity portion of these investments would get listed to provide an exit option to investors thereby increasing options for market participants
• Consistent advent of high-quality investors like SWF would increase the corporate governance, reporting and accountability standards in the market.

The introduction of exemptions for SWFs is a positive initiative to bring in the much need patient capital in an infrastructure starved economy.

However, tax exemptions alone are not going to drive investment decisions given the scale and complexity of these investments.

The author is Founder and Managing Partner of DVS Advisors LLP