The finance ministry has allowed Mauritius-based funds to get preferential category-I foreign portfolio investor (FPI) license, according to an order passed on Monday.

The decision was taken as Mauritius was not a Financial Action Task Force (FATF) compliant country, and was not eligible for category-I FPI license as per earlier Sebi regulations.

Funds included in this category are not subject to indirect transfer taxes under the Income Tax Act, which essentially means they would not be taxed as per Indian laws.

On April 7, Sebi amended its FPI rules to allow funds from FATF non-compliant nations to be included in the FPI I category with approval from the government.

The move was necessitated as the government had removed the exemptions from indirect transfer tax for category-II FPIs during the Union Budget 2019-20.

As the FATF had put Mauritius on a ‘grey list’, funds based there were unable to get a category-I FPI license.

This meant Mauritius-based funds were subject to additional taxes compared to their peers in Hong Kong or Singapore, both FATF compliant countries.

After the US, Mauritius is the second largest source of FPI funds in India, accounting for 13% of total FPI assets.