Budget may give FPIs relief from tax on indirect transfers

January 27, 2017 11:12 IST

Indirect transfer provisions were introduced in 2012 to handle the taxation of transactions wherein share transfers happened abroad, although the underlying assets were Indian.

It appears the coming Union Budget might give relief to foreign portfolio investors from taxation on indirect transfers.

Sources aver the so-called category-I and -II FPIs would be kept out of the provisions. The latter could be made applicable only in those cases where the transfers have amounted to a change in control.

Many representations have come from foreign investors that the circular earlier issued in this regard could lead to triple taxation. The Central Board of Direct Taxes had recently put the circular in abeyance for the time being.

“It was a temporary fix and if the fears of foreign funds have to be negated, they have to be permanently exempted. Legally, the only way to do it is amending the Income Tax Act. However, the government is in no mood to provide a blanket rule for all FPIs, as they comprise multiple types of investors. The idea is to exempt the long-term and properly regulated funds from the circular,” said a source.

This issue rose after the CBDT issued a 19-item list of 'Frequently Asked Questions' (and its answers to these) on its 2012 indirect transfer provisions circular. The clarification said indirect taxes would be applicable on internal transfers in India-dedicated funds -- those deploying more than half of their total investments

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in India. By sector estimates, such funds constitute nearly a third of all foreign investments in the stock markets.

“FPIs should get complete exemption from the indirect share transfer provisions, as the FPI itself is registered as a taxpayer in India and files its tax return. This is more relevant in the case of Category I and II FPIs, as they are usually sovereign, pension or broad-based funds, sufficiently regulated,” said Rajesh Gandhi, partner, Deloitte Haskins and Sells.

Experts say such provisions are also not easy to implement, as an FPI is not a single entity. As with a mutual fund, FPIs are funds pooled from various investors. Authorities compute tax at the fund level. Later, depending on the holding, the fund transfers the liability to end-investors.

“FPIs had a lot of concerns with these rules. One, emanating from the circular, was if an FPI which invests in the listed space undergoes a change in the shareholding offshore, the shareholder will have a tax liability in India for such a transaction, unless specially exempted. As these funds have a complex structure, it would be a never-ending pursuit to track such transfers and gains, so as to comply with the tax obligations in India,” said Pranay Bhatia, tax partner, BDO India.

Indirect transfer provisions were introduced in 2012 to handle the taxation of transactions wherein share transfers happened abroad, although the underlying assets were Indian. The issue came up in a big way after the $11-billion acquisition of Hutchison Essar by Vodafone.

Illustration: Uttam Ghosh/Rediff.com.