March 23, 2017

Relief for entities registered under earlier FII norms and FPI norms now

The amendments to Finance Bill gave relief to foreign portfolio investors from indirect tax provisions. But there are certain areas where clarity is awaited.

The background

In the Finance Act 2012, an amendment was inserted in the Income Tax Act that made transfer of shares or interest in a company or entity registered or incorporated outside India, taxable in India, if it derived its value substantially from assets located within India.

The amendment was made to address the Vodafone ruling and bring other indirect transfer of assets into the tax net. However, investments of investors residing outside India in FIIs or FPIs registered with SEBI also fell under this provision.

When foreign investors requested the tax authorities to ring-fence foreign portfolio investors from the applicability of indirect tax provisions, the Budget 2017 provided relief by inserting an amendment that granted relief from “indirect transfer” provisions to category I and category II, Foreign Portfolio Investors.
The recent change

“Considering that SEBI (FPI) regulations were notified only in 2014, all portfolio investments prior to this notification were made by FIIs earlier registered under FII Regulations, 1995. The proposed explanation 5A, could have led to a situation where disputes would have arisen as to whether exemption from “indirect transfer” provisions would be available to FIIs who made portfolio investments in India prior to notification of FPI regulations.,” says Rahul Jain, Partner, Nangia & Co.

In the amended Finance Bill 2017, the relief has been rationalised and made this available to both FIIs registered under earlier FII regulations as well as to Category I and Category II FPIs registered under FPI regulations.

“Exempting category I FPIs is not likely to cause too much of a problem since these are relatively smaller investors and are unlikely to hold substantial stake in a single company,” says Shefali Garodia, Partner, BMR Associates.
Grey areas

While the clarification is welcome, some areas need to be explained in the days to come.

“On reading of the amended Provisos, it appears that Government has put to question the investments held in the FIIs which are disposed of prior to April 1, 2011. The proviso for exempting FIIs is applicable from AY 2012-13 onwards only. The tax authorities can technically reopen the assessments for the AY 2010-11 and AY 2011-12 so it seems that the problem has not been addressed fully,” says Jain.

Also the government is silent on the recent change in the Union Budget that made sale of formerly unlisted companies liable to long term capital gains tax. Many start-up companies and entrepreneurs had expressed reservations on this.

[The Hindu Business Line]