Mumbai, February 1, 2017

The announcement comes within a month after the CBDT put its controversial 2012 circular in abeyance

The Union Budget provided much needed breather for foreign portfolio investors (FPIs) in terms of taxing indirect transfers. Category I and II FPIs will now be exempt from being offshore asset sales whose underlying securities are Indian. Income Tax Act will be amended accordingly to provision these changes. However, the provisions will continue to apply for category III FPIs. The announcement comes within a month after Central Board of Direct Taxes (CBDT) put its controversial 2012 circular in abeyance.

Market participants welcome the move as it puts to rest lot of concerns of FPIs over the circular. “It would provide relief to foreign investors who were concerned over taxation under indirect transfer provisions as clarified by the CBDT late last year, although the clarification was kept in abeyance post representations. Therefore with this proposed amendment, the CBDT circular would be Null and void for such FPIs. The category III FPIs are largely individuals and family offices and hence may not have major impact of indirect transfer taxation,” said Riaz Thingna, Director, Grant Thornton Advisory.

The issue of taxing indirect transfers came light after CBDT released a 19 question FAQ on its 2012 indirect transfer provisions circular. The clarification said indirect taxes would be applicable on internal transfers in the so-called India dedicated funds i.e. the funds which have deployed more than half of their total investments in India. According to industry estimates, such funds constitute nearly one-third of the total foreign investments in stock mark.

Indirect transfer provisions were introduced in 2012 to handle the taxation of transactions wherein share transfers happened overseas although the underlying assets were Indian. The issue came in light during the $11 billion acquisition of Hutchison Essar by Vodafone.

According to Securities and Exchange Board of India (Sebi) regulations, there are three categories of FPIs. Category I comprise of the sovereign funds while category II are broad based funds which are appropriately regulated. Category II funds include mutual funds, insurance funds etc. Category III FPIs are unregulated funds like endowment or funds run by charitable societies.

[The Business Standard]