Last month, the CBDT had issued a circular clarifying that overseas transfer tax would clearly be applicable to FPIs.
The controversial overseas transfer tax provisions were finally put to rest for foreign portfolio investors (FPIs) by the finance minister on Feb 1. The indirect transfer tax was brought by way of a clarification in 2012 with retrospective effect from 1962 (subsequent to the landmark Hon’ble Supreme Court judgment in case of Vodafone). Essentially, an overseas transfer of shares or interest in a foreign company or entity is taxable in India if it derives more than 50% of its value from assets located in India. The retroactivity had caused a lot of concern to the investing community. Last month, the CBDT had issued a circular clarifying that overseas transfer tax would clearly be applicable to FPIs. This effectively led to a double or even multiple taxation of same income, as well as, onerous India compliances for the ultimate investor at the time of redemptions by India focused FPIs (investing 50% or more of its corpus in India). A scurry of representations to MoF and CBDT had followed leading to the circular being put on hold. All eyes of FPI industry were again set on the budget proposals to address this issue.
In his budget speech, the finance minister announced that Category I and Category II FPIs will be excluded from the ambit of overseas transfer tax. These two categories of FPIs, consisting of central banks, sovereign wealth funds, mutual funds, insurance companies, etc. together form around 90 percent of roughly 8000 plus FPIs registered with SEBI. This amendment reinforces that the Indian government is committed to ensure and work towards a clear and unambiguous tax regime.
However, there is also Category III type of FPI registration - which include endowments, charitable trusts and societies, foundations, corporate bodies, as well as few India focused funds (those that do not meet Category II conditions). Does this announcement settle the issue for such Cat III FPIs which are India focussed? The answer seems to be negative.
Based on the proposed amendment, India focused FPIs registered as Category III will continue to be exposed to the overseas transfer tax, which seems to be an anomaly. The finance minister, in his budget speech, also mentioned of issuance of a clarification that these provisions shall not apply to redemption or sale of investment in India which is chargeable to tax in India. We will have to wait with bated breath for this clarification, which should extend the benefit to Category III FPIs, among others.
Suresh Swamy is Tax Partner of PwC-Tax and Regulatory Services, Mumbai
Tushar Patel is Director of PwC-Tax and Regulatory Services, Mumbai