India mulls exemption of PAN for foreign investors directly investing in capital markets

NEW DELHI: India may exempt individual foreign investors and trusts that invest directly in the capital markets from the need to acquire a Permanent Account Number (PAN), a mandatory requirement for all tax payers. In January this year the government allowed individual foreign investors, such as family offices that manage the investments of wealthy families, to invest directly in Indian debt and equity through the qualified investor route (QFI).

The proposal, mooted by finance ministry's department of economic affairs (DEA), has been triggered by feedback from potential investors at road shows held outside India.

But the idea is being opposed by the tax authorities on the ground that it will make it harder to track fund flows.

"Stringent know your customer norms are already in place for investors so it (PAN) is seen as a psychological barrier," said a ministry official aware of the internal discussions in the ministry. Investors who claim a tax refund will however need a PAN.

There is no certainty that the proposal will be adopted given the opposition of tax-department, said officials familiar with the internal discussions in the finance ministry.

Said Jyoti Rai, head business development, SBI-SocGen Global Securities Service: "Applying for a PAN is more a psychological barrier for foreign investors and hence its removal it will raise the initial entry comfort for foreign Investors such as QFIs".



India has already received its first investment of $5 million through the qualified framework investor route that the finance ministry estimates can net $30 billion of investment over the next 15-18 months.

Former finance minister Pranab Mukherjee had opened the QFI window for investments in mutual funds in the 2011-12 budget. It was further liberalised to include both debt and equity earlier this year allowing direct access to Indian markets for foreign investors rather than through foreign institutional investors.

The income tax department may not easily relent, officials say, as the PAN number forms the cornerstone of its information gathering process.

Ameet Patel, Partner, Sudit K Parekh & Co said : "Without PAN, the granting of credit for the tax deducted at source or advance tax would become an issue".

Further, exempting a section of investors from the need to get hold of a PAN number may require amendments in the I-T act.