Supreme Court in case of Vodafone India held that gains arising to a foreign company from transfer of shares of a foreign holding company, which indirectly held equity interest in an Indian operating company would not be taxable in India. Pursuant to the Vodafone ruling, indirect transfer provisions were introduced vide the Finance Act, 2012 by amending section 9(1)(i) of the Act with retrospective effect from 1 April 1961.
Pursuant to representation made by various stakeholders, detailed amendment in the Act was introduced with respect to taxability of indirect transfer by the Finance Act 2015 w.e.f. 1-4- 2016. The amendments by Finance Act 2015 lay down the rules and the mechanism in which indirect transfers would be subject to tax in India. Pursuant to the amendment, share or interest shall be deemed to derive its value substantially from assets (tangible or intangible) located in India, if on a specified date, the value of Indian assets exceeds INR 100 million; and represents at least 50% of the value of all assets owned by the company or entity. Further, an exemption is also provided from the trigger of indirect transfer provisions to “small shareholders”.
Thereafter Indirect-transfer Rules were issued vide Notification 55/2016 dated 28 June 2016, which provided for valuation mechanism, determination of proportionate income, form for reporting compliance and details of documents to be maintained in relation to the indirect transfer provisions. However, there was not much clarity with respect to various aspects of taxation and reporting of indirect transfers, particularly in relation to investors of FPI’s.
Accordingly, CBDT has issued a 19 pointer circular that clarifies various aspects of Indian transfer. The key takeaways of the recent clarifications are as under:
- Transfer/redemption of units by Investors of the fund investing in India shall also come under the purview of indirect transfer, unless they qualify as small shareholder
- In case of a master-feeder structure of funds, if the feeder funds individually qualify as small shareholder, indirect transfer provisions shall not apply
- Similarly, in case of nominee-distributor structure of offshore fund, if the investors individually qualify as small shareholder, indirect transfer provisions shall not apply
- Where an offshore fund invests 10% of its corpus in an India focused fund, indirect transfer provisions shall apply to such offshore fund, since the Indian focused fund derives its value substantially from assets located in India.
- If value of India assets of an offshore fund constitutes more than 50% of its total assets and exceeds INR 100 million, which is merged into another fund in a tax neutral jurisdiction, what shall be the Indian tax implications? If both the funds are corporate entities, the merger shall not be taxable in India [section 47(viab) of the Act]. However, if both the funds qualify to be non-corporate entities, indirect transfer provisions will be applicable. In both the scenarios, investors of the fund shall come under the purview of indirect transfer provisions.
- Where indirect transfer provisions are triggered, payers of income (including FPIs) will be required to comply with withholding tax requirements as specified in the Act
This circular primarily seeks to provide clarity on applicability or otherwise of indirect transfer provisions in the hands of FPI and its investors. While the responses addressed in the circular are quite generalist, the circular would go a long way in rationalizing the tax implications arising due to transfer of units held by investors of FPI’s. Overall the clarifications are quite positive and establish that the indirect transfer provisions shall not be applied with respect to transactions which are below the specified threshold.