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| Capital gains tax blow may soften for foreign firms exiting JVs |
| Anindita Dey / Mumbai Aug 05, 2009, 00:02 IST |
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Authority for Advance Ruling dispenses with complex forex indexation requirement
A precedent-setting order by the Authority for Advance Ruling (AAR) could enable foreign companies exiting their India joint ventures to pay long-term capital gains tax at a concessional 10 per cent rate instead of linking it to a complex indexation formula that requires multiple foreign currency conversions.
AAR's ruling, passed late last month in response to an appeal filed by Fujitsu Services, has said the concessional capital gains tax would be applicable for foreign companies selling shares or debentures when they exit Indian ventures. Such debentures or shares should be listed on stock exchanges and held for more than 12 months.
Before this, the income tax department used to insist on the computation of long-term tax on the basis of “indexation” to avail of the concessional rate of 10 per cent by foreigners.
Indexation means that capital gains has to be computed by deducting the cost of acquisition and "improvement" from the cost of acquisition of the asset, which in this case are shares and debentures. The "improvement" will be deducted only after converting the cost of acquisition expenditure into the same foreign currency as was initially used for the purchase of shares or debentures. Once that is done, the capital gains computed in foreign currency has to be reconverted into Indian rupees.
Since the rupee has depreciated since these investments were made, the exiting foreign company ends up paying a higher amount as capital gains tax.
AAR's latest ruling has highlighted section 112(1) of the Income Tax Act that confers the benefit of a lower rate of tax on a non-resident foreign company provided the investor has applied indexation to the calculation of tax. The authority has, however, dispensed with indexation as a pre-condition for non-resident companies to avail of the benefit of the lower tax.
The AAR was of the view that the cost of indexation should be applied uniformly to both Indian and foreign companies. “The income tax department should not hold it as a precondition for any company to confer the benefit to of concessional rate of tax,” it said in its ruling. AAR pointed out that indexation was provided as a second proviso to the section 48 which specifies the computation of capital gains tax.
Tax experts were of the view that this ruling would have significant implications on the computation of long-term capital gains tax in cases such as Hutch, which exited its telecom venture in India, and has a tax liability of around $2 billion under legal contention.
Fujitsu exited Zensar Technologies in 2007 after it sold its 26.55 per cent stake to Jubilee Investments and Cyprus-based company Pedriano, which in turn is a wholly-owned subsidiary of Petrochem International (Petrochem). Petrochem is a wholly-owned subsidiary of Jubilee. Fujitsu had acquired Zensar in 1993-94.
The appeal was filed after the income tax department attached the precondition of application of the “principle of indexation” for the foreign company to avail of the benefit of a lower tax rate.
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