Govt proposes to exempt FPIs from indirect transfer provision

Seeking to assuage concerns of overseas investors, the government today announced relief for well-regulated FPIs from tax liability arising out of sale of assets or shares in a foreign company due to redemption of an investment within India.
Presenting the Budget in Parliament, Finance Minister Arun Jaitley proposed that category I and II foreign portfolio investors (FPIs) should be exempted from taxation on indirect transfers.
"In 2012, the Income-Tax Act was amended to provide for taxation of those transactions of transfer of shares or interest in a foreign entity deriving its value substantially from Indian assets," Jaitley said.
"Apprehensions have been raised about some difficulties which arise because of this provision in case of transfer of stake of investors of India-based funds located abroad, but investing in India-based companies," he added.

In order to remove this difficulty, Jaitley has proposed to exempt FPI category I and II from the indirect transfer provision.
"I also propose to issue a clarification that indirect transfer provision shall not apply in the case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India," he said.

Category I FPIs include sovereign wealth funds and central banks and category II includes mutual funds and banks. However, hedge funds, individuals and other high-risk foreign investors will not get this relief.

Pranay Bhatia, Partner, Direct Tax at BDO India, said the proposed amendment to the law would set at rest apprehensions of foreign investors.
(REOPEN DCM 38)
In response to various queries raised by stakeholders seeking clarification on the scope of indirect transfer provisions, the CBDT had issued circular in December. However, concerns have been raised by stakeholders that the provisions result in multiple taxation.
However, last month, CBDT had kept in abeyance its recent circular on indirect transfer of shares by foreign investors.
To address these concerns, the government has proposed to amend the Income Tax Act to exempt category I and II foreign FPIs from taxation on indirect transfers.

The amendments in the Income Tax Act will take effect retrospectively from April 1, 2012 and will, accordingly, apply in relation to assessment year 2012-13 and subsequent years.