Tax dept keeps in abeyance circular on indirect transfer

In a relief to FPIs who were fearing multiple taxation, the tax department today kept in abeyance its recent circular on indirect transfer of shares by foreign investors.

The Central Board of Direct Taxes (CBDT) on December 21, 2016, came out with a notification giving 19 illustrations with regard to how the indirect transfer regulations would kick in and the tax impact.

The illustration, particularly in the context of offshore PE/VC funds and FPIs, according to experts ignored the practical issues arising from indirect transfers.

CBDT today said it has received representations from various FPIs, FIIs, Venture Capital Funds and other stakeholders who said that the circular does not address the issue of possible multiple taxation of the same income.

"The representations made by the stakeholders are currently under consideration and examination. Pending a decision in the matter the operation of the above mentioned circular is kept in abeyance for the time being," CBDT said.

Nangia & Co Partner Amit Agarwal said FII/FPIs are highly sensitive breed of investments and the circular had brought in more apprehensions than clarity.

"The withdrawal of the circular is indeed welcome. The consultative process adopted by the government too deserves appreciation," Agarwal said.

The December 21 circular contained responses to questions raised by various stakeholders in the context of the applicability of the indirect transfer provisions under the Indian I-T Act.

While the circular was intended to provide clarity on the circumstances in which the indirect transfer provisions are to be applied, it fails to address the concerns of various stakeholders, chiefly FPIs, with regard to issues like potential double and triple taxation, onerous compliance requirements, and lack of tax neutral foreign corporate restructuring.

Section 9(1) of the I-T Act was amended by Finance Act 2012 with retrospective effect to provide for taxing the gains arising out of transfer of an asset, even if registered or incorporated outside India, which derives its value, directly or indirectly, substantially from an asset situated in India.