While the government has attempted to clear an ambiguity over the rules on taxation of indirect transfers abroad, an important demand from foreign portfolio investors (FPIs) for an increase in the threshold limit has not been met.

The rules for computation of 'fair market value' for indirect transfers were introduced earlier this year to prevent a Vodafone-type tax dispute in future.

An indirect transfer abroad between two companies would draw tax if the value of Indian assets of the company concerned on the specified date exceeds Rs 10 crore and it represents at least half the value of all the assets owned by such a foreign company.

FPIs found the monetary limit to be too low and pitched for a higher limit, of at least Rs 100 crore. "The government has made it clear with the circular that it does not intend to increase the monetary limit, considered too low by FPIs. The 50% bit does not matter to FPIs, as they derive 100% value from Indian companies. The only grace for them would have been a hike in the monetary limit," said Amit Singhania, partner in the legal firm of Shardul Amarchand Mangaldas and Co.

The Central Board of Direct Taxes (CBDT) has unequivocally clarified that the threshold limit of 10 crore with respect to taxation of indirect transfer of assets is reasonable, and is not likely to be reviewed in the near future, said Rakesh Nangia, managing partner, Nangia & Co.

The government had introduced the rule on indirect transfers with retrospective effect from April 1962 in 2012, to bring Vodafone's into the tax net. Later, the government had clarified that it would not ordinarily bring about any change retrospectively which created a fresh liability.

The reporting obligation is on Indian companies whose indirect shareholding undergoes a change and penalties are proposed for non-compliance.

CBDT received queries with respect to the scope of the indirect transfer provisions. It set up a working group in June to examine the issues raised by stakeholders. Experts also expressed concern over the extensive reporting requirements for Indian companies. "The reporting requirements are far too onerous. And, in most cases, it is impractical for an Indian company to seek information on a daily basis of changes in investors in broadbased funds," said Abhishek Goenka, partner at consultancy PwC.

However, the clarification does not address any of these difficulties and leaves it open, saying that as the rules are new, the implementation challenges should be first seen. This goes against the 'ease of doing business' mantra, Goenka added.

Nangia says the list of FAQs (frequently asked questions, with answers) issued by the government lack the detailed explanation and views as were expected. "The introduction of indirect transfer rules has ushered significant uncertainty with respect to taxation and the reporting requirements of investors of FPIs holding significant stake in Indian assets," he said.

According to the rules, if the asset is the share of an Indian company listed on a recognised stock exchange, the fair market value of the scrip will be the price on the stock exchange. When the share is listed on more than one recognised exchange, the price on the exchange recording the highest volume of trading in the share will be considered.

If the asset is the share of an Indian company not listed on a recognised exchange on the specified date, the fair market value will be the one determined by a merchant banker or an accountant 'in accordance with any internationally accepted pricing methodology for valuation of shares on an arm's length basis and increased by the liability, if any, considered in such determination'.

The rules are relevant to avoid Vodafone tax-type disputes. Vodafone International Holdings BV, a Dutch company, bought 67% stake in an Indian company, Hutchinson Essar Ltd (HEL), by buying 100% stake in CGP (Holdings) Ltd, a Cayman Islands company. CGP, a subsidiary of Hutchinson Telecommunications International Ltd, owned the Indian assets of HEL through a complicated network of intermediate entities.

Vodafone did not pay tax to the Indian authorities as it was an offshore deal. However, the authorities here argued that it was liable to be taxed in India, as it involved an indirect transfer of Indian assets. The dispute is currently in international arbitration.