CBDT rules out tax relief for large FPIs under indirect transfer provision

CBDT rules out tax relief for large FPIs under indirect transfer provision

New Delhi: The Central Board of Direct Taxes (CBDT) on Wednesday ruled out ring-fencing large foreign portfolio investors (FPIs) and offshore funds from tax liability arising out of sale of assets of a foreign company which has substantial assets based in India.

Large FPIs and offshore funds had approached the finance ministry for a special carve-out since they don’t have a managerial role in such companies.

Under the indirect transfer provisions contained in Section 9 (1Xi) of the Income Tax Act, all income arising from any asset or source of income in India or through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.

In a similar case, the government had raised tax claims on Vodafone Group Inc. for its purchase of assets of Hutchison Essar Telecom services by in India in 2007.

On 26 March 2015, CBDT clarified that if at least 50% of the value of assets owned by such a company is based in India, the company will be liable to pay taxes in India. However, the tax department provided a carve-out to small investors holding no right of management or control of such company and holding less than 5% of the total voting power or share capital in the entity.

However, the board constituted a working group on 15 June, after it received queries about indirect transfer provisions raised by offshore funds registered as FPIs. After considering the comments of the working group, CBDT issued clarification through a set of 19 questions and answers depicting various scenarios under which offshore funds may have invested in companies in India.

For example, in case a fund is set up in an offshore jurisdiction pools money from retail/institutional investors and invests in shares of Indian listed companies, if the fund on request of its unit holders/shareholders, redeems their units/shares, then CBDT clarified that it will be liable to pay taxes in India.

Abhishek Goenka, partner, direct tax at PwC, said the concerns raised by funds and FPIs were legitimate since in most cases, investors do not have any rights of management or control in the fund vehicles.

“However, the clarification stops short of specifically appreciating and addressing the specific situations and in most cases, only refers back to the provisions of the law, which are creating the concerns in the first place,” he added.

However, Rakesh Bhargava, director at law firm Taxmann, said the CBDT has examined 19 issues of stakeholders on the scope of indirect tax provisions under Section 9(1)(i) of the Income Tax Act. “It has clarified various issues relating to FPI. Such clarification brings the true spirit of law and it will definitely clear the uncertainty in minds of FPI, retail and institutional investors,” it added.