Income from sale of securities in India by funds based abroad will be exempt from capital gains tax, the government announced. This exemption will be given only when the India-focused fund is also charged to tax in India. The Central Board of Direct Taxes (CBDT) said the tax provision on indirect transfer would not apply to this type of income at private equity and venture capital funds. This, say experts, ought to reassure those investing in India through a multi-layered structure. The issue was a concern among foreign portfolio investors (FPIs). The Finance Act of 2012 had amended section 9 of the Income Tax Act to address the ruling given by the Supreme Court in favour of Vodafone.
Accordingly, gains through indirect transfers were made subject to capital gains tax. The condition being that the Indian assets should exceed Rs 10 crore and represent at least half the value of all assets held by the foreign investor.Investors holding less than five per cent of the share capital or voting power of the company were exempt from this. The wording was such that a multi-layered structure (followed by PE funds, venture funds, pension funds) could be subject to multiple levy, despite taxes having already been paid in India by the foreign institutional investor. On December 21 last year, CBDT issued a circular that offshore vehicles, including FPIs, were subject to indirect transfer provisions. The move had set alarm bells ringing in fund houses from Hong Kong to London to New York. Accordingly, CBDT had put the matter in abeyance the next month.