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To avoid double-taxation CBDT says no tax at upstream foreign fund if local fund paid already
November, 09th 2017

The Central Board of Direct Taxes (CBDT) on Wednesday said the income accruing to non-residents due to indirect transfer or redemption of shares in a mulit-tier investment fund in India, held through upstream companies based abroad, will not be taxed, provided the fund already pays taxes on income.

The Central Board of Direct Taxes (CBDT) on Wednesday said the income accruing to non-residents due to indirect transfer or redemption of shares in a mulit-tier investment fund in India, held through upstream companies based abroad, will not be taxed, provided the fund already pays taxes on income. The idea is to avoid double taxation. N BHowever, the board said benefit will be applicable only in those cases where the proceeds of redemption or buyback arising to the non-resident do not exceed the pro-rata share of the non-resident in the total consideration realised by the specified funds from the transfer of shares or securities in India.

The last Budget had exempted Category 1/2 foreign portfolio investors from indirect tax provisions.
CBDT’s latest clarification comes on the back of concerns expressed by investment funds, including private equity funds and venture capital funds, that on account of the extant indirect transfer provisions in the Act, non-resident investment funds investing in India, which are set up as multi-tier investment structures, suffer multiple taxation of the same income at the time of subsequent redemption or buyback. To be sure, the exemption will not be available to non-residents investing directly in the specified funds. Such taxability arises firstly at the level of the fund in India on its short-term capital gain and business income and then at every upper level of investment in the fund chain on subsequent redemption or buyback, the board said.

“This is a welcome clarification that would mitigate multiple taxation of income that is upstreamed to non-residents who are holding indirect interest in an Indian Investment Fund/VCC/VCF. It has been clarified that once such fund/VCC/VCF has been subject to tax in India on disposal of shares/securities held in India, the receipt by non-resident investors by way of upstreaming of the same income (could be by way of redemption or buyback effected outside India) would not be subject to tax in India under the indirect transfer provisions,” Radhika Jain, partner, Grant Thornton, said. According to Rakesh Nangia, managing partner at Nangia and Co, “the circular is expected to provide the much-needed clarity on aspects of investor level taxation.”

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