Union Budget 2017-18: What you must know about indirect transfers

Moneycontrol Bureau

The Union Budget 2017-18 has exempted Foreign Portfolio Investors (FPIs) in Category I and II from the indirect transfer provision which has often been criticised by foreign investors. Here is a lowdown on what these provisions mean and their history:-

What is the provision?

Indirect transfer provisions are applicable to foreign investors when they make any sale outside India and when they have an underlying asset in India. For example, if X and Y enter into an agreement where the latter purchases the former and X already has an asset in India, it will be taxed in India.

Hence, an asset or a capital asset will be deemed to be situated in India if they derive any interest or substantial value, directly or indirectly from India.

When was it introduced?

The Direct Taxes Code had first introduced the concept of taxing indirect transfer of assets that were based in India. Later, the Vodafone tax case brought this into the forefront again.

The deal between Hutch-Vodafone deal that took place in 2007 involved transfer of shares of a foreign company outside India, which indirectly held the shares of an Indian company. Later, the tax authorities imposed capital gains tax with penalties on Vodafone, after which the Supreme Court in 2012 said that indirect transfer would not be taxable in India.

Post this, there was the infamous retrospective amendment of the tax laws in 2012 which said that such transactions will be taxable.

What do these provisions state?

Under Section 9(1)(i) of the Income Tax Act, 1961, these indirect transfer provisions apply if the Indian assets exceed Rs 10 crore and represent at least 50 percent of the value of total assets held by the overseas investor.

What were the issues?

Foreign institutional investors, foreign portfolio investors and venture capital funds had opposed this taxation. They stated that there is a possibility of multiple taxation being imposed on the same income.

What is its status now?

In December, the Central Board of Direct Tax (CBDT) had issued a circular stating that these provisions will continue.

This was however revised. CBDT on January 17, 2017 said that these provisions will be put on hold for the time-being. The Budget announcement has now excluded FPIs (Category I and II) from paying these taxes. Here, Category I and II include government and government-related investors such as central banks, sovereign wealth funds, mutual funds, investment trusts, insurance companies, asset management companies, among others.