Union Budget 2017: Relief from indirect transfer provisions for foreign investors

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New Delhi: Finance minister Arun Jaitley on Wednesday exempted foreign portfolio investors (FPIs) from the purview of indirect transfer provisions, offering them a tax respite.

Application of indirect transfer provisions would have taxed any profits made by funds with underlying assets (including equities) in India.

“In order to remove this difficulty, I propose to exempt foreign portfolio investors (FPIs) category I and II from the indirect transfer provision. I also propose to issue a clarification that indirect transfer provisions shall not apply in case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India,” the finance minister said in his budget speech.

Category I FPIs include foreign central banks, sovereign wealth funds and government agencies. Pension funds are an example of category II FPIs.

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The clarification puts to rest worries of FPIs, private equity and venture capital funds emanating from a 21 December circular of the tax department.

This circular sought to apply indirect transfer provisions to foreign portfolio investors and would have subjected them, especially those with India-focused funds, to greater scrutiny by the income-tax department and led to double taxation in many cases.

The circular was, however, put on hold last month, after opposition from foreign investors.

Milind Kothari, managing partner and head of direct tax, BDO India, said the clarification was timely and would soothe the nerves that were frayed by last year’s circular.

Indirect transfer provisions were introduced in the I-T Act in 2012 with retrospective effect, as the government sought to bring Vodafone Group Plc.’s $11 billion acquisition of Hutchison Essar Ltd in 2007 (by buying a Cayman subsidiary owned by Hutchison International) and other such transactions under the tax net in India.

Indirect transfer provisions deal with taxation of transactions wherein even though the transfer of shares takes place overseas, the underlying assets are in India.

To remove the sting from the retrospective amendment to the tax laws by the previous government, the government had subsequently clarified that only those indirect transfer transactions wherein more than 50% of the underlying assets are in India will be subject to the levy of capital gains tax in India. But the clarifications also extended the tax to funds, including those outside India.