Relief to FPIs in India as tax liability circular put in abeyance

Foreign portfolio investors have pulled out as much as $11 billion from the Indian markets in the October-December quarter, with analysts blaming demonetisation for the outflow.

By: ENS Economic Bureau | New Delhi | Published: January 18, 2017 1:18 am

In a major relief to foreign portfolio investors (FPIs) in India, the Central Board of Direct Taxes (CBDT) on Tuesday put in abeyance its December 21 circular that amplified their concerns over a potential rise in tax liability under India’s controversial indirect transfer provisions. Tax experts said that the decision to not implement the circular, coming as it does ahead of Budget FY18, signalled the government’s intent to spare small overseas investors in FPIs registered in India from paying taxes in India on redemption of shares/units.

The December circular, which reiterated the provisions under Section 9 of the Income Tax Act, suggested that sort of double taxation: India-registered FPIs pay taxes in India on direct transfer of shares in Indian companies and the investors in them too are liable to tax in India under the indirect transfer provisions on redemption of units by the portfolio investors. Although a special carve-out was given to small investors holding 5 per cent or less in a fund and without any right of management or control, this was felt grossly inadequate and inconsistent with the FPI investment structure. According to Ketan Dalal, senior tax partner at PwC, the government might raise the carve-out threshold to 51 per cent or at least 26 per cent so that India-focused FPIs’ ability to pool money from retail and institutional investors to invest in Indian stocks won’t be circumscribed. This would require an amendment to the I-T Act.

Watch What Else Is making News

Foreign portfolio investors have pulled out as much as $11 billion from the Indian markets in the October-December quarter, with analysts blaming demonetisation for the outflow.

The indirect tax provisions have their genesis in the government’s decision to overrule the Supreme Court judgement in the Vodafone case via a retrospective amendment in the Finance Act, 2012.

According to the amendment, “If an asset, being a share or a interest in a company or entity, registered or incorporated outside India, derives its value, directly or indirectly, substantially from an asset situated in India, the gains arising from the transfer of such share or interest would be taxable in India.” And it was clarified that the value will be deemed to be derived from India substantially if more than 50 per cent of the total assets of the fund are from India and value of the assets exceed Rs 10 crore.

While the indirect transfer rule itself was considered to be regressive, the rules that brought the overseas investors also under its ambit annoyed the investor community even more. The December 21 circular, in the form of answers to 19 FAQs, only stressed the relevant changes in the I-T Act and offered no relief to investors.

The CBDT said on Tuesday: “Circular No. 41/2016 was issued on 21.12.2016 which dealt with clarification on indirect transfer provisions.

After the issue of the aforementioned circular, representations have been received from various FPIs, FIIs and VCFs and other stakeholders. The stakeholders have presented their concerns stating that the circular does not address the issue of possible multiple taxation of the same income. The representations made by the stakeholders are currently under consideration and examination. Pending a decision in the matter the operation of the above mentioned circular in kept in abeyance for the time being.”

For all the latest Business News, download Indian Express App

  1. N
    Jan 18, 2017 at 7:07 am
    Govt. has to make up its mind whether it wants foreign capital (especially when interest rates in India are always higher than int'nl markets and liquidity in Indian markets is not great) to fund domestic growth story or it wants to squeeze last bit of tax out of such investments. We should not be under the delusion that we can dictate terms as per our whims and wishes.