Indirect transfer: FIIs get tax exemption from April 2011 to March 2015

But the government has left prior period cases open for interpretation

The government has exempted foreign institutional investors (FIIs) from taxation of indirect transfers of Indian assets made after 2011 but has left prior period cases open for interpretation.

The Finance Bill 2017 approved with 40 amendments to different laws, exempts FIIs for "an assessment year commencing on or after April 1, 2012 but before April 1, 2015".

Similar relief from tax liability arising out of sale of assets or shares in a foreign company due to redemption of an investment within India is provided to foreign portfolio investment (FPI) Category I and II from April 1, 2015.

The FPI regime under Sebi regulations came into being from mid-2014.

The tax department had in December stated that FPIs were subject to provisions relating to the indirect transfer of Indian assets.

The circular, in the form of frequently asked questions (FAQs), said that if the value of shares of Indian companies held by a fund constituted more than 50 per cent of its total assets and the value of the holding exceeded Rs 10 crore, the transaction would be taxed in India under the indirect transfer rules.

There were fears that transactions prior to 2015 could be taxed with retrospective effect.

Finance Minister Arun Jaitley had in his Budget for 2017 -18 proposed to be insert an explanation in Section 9 of the Income Tax Act, 1961 to grant relief from indirect transfer provisions to Foreign Institutional Investors (FIIs), registered as Category I and Category II Foreign Portfolio Investors (FPIs) under Securities and Exchange Board of India (Sebi) (FPI) Regulations, 2014.

Considering 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 explanation in its earlier form created doubts, as to whether benefit from indirect transfer provisions would also be available to FIIs who made portfolio investments in India prior to notification of FPI regulations.

"In the amended Finance Bill 2017, it has been attempted rationalize this relief and made this available to both FIIs registered under earlier FII regulations as well as to Category-I and II FPIs registered under FPI regulations by inserting 2 separate provisos (instead of earlier proposed Explanation 5A) exempting FIIs, who made investments before 1 April 2011 and FPIs, who made investments after 1 April 2014," said Rahul Jain, Partner, Nangia & Co.

He, however, said the government appears to have again left controversy open for investments made by FIIs before April 1, 2011.

"The proviso for exempting FIIs is applicable from AY 2012-13 (FY 2011-12) onwards only. The tax authorities can technically reopen the assessments for the assessment years 2010-11 and 2011-12 so the indirect transfers tax may yet cause some headaches to the FIIs," he added.