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Many foreign investors reach out to tax experts about indirect transfer of shares provisions
March, 09th 2017

Fearing that they could attract tax in India due to their current structures, several foreign portfolio investors (FPIs) and some private equity funds have reached out to their tax advisors as to whether there could be a way around indirect transfer of shares.

The issue around indirect transfer of shares was rekindled by CBDT in December when it issued a clarification talking about specific situations where the tax would apply. Before this circular it was assumed by the industry that FPIs were exempted from indirect transfer of shares.

The government in the recent budget gave a leeway to category 1 and category 2 foreign portfolio investors (FPIs), which also mean that all other foreign investors could still face 10% to 40% tax on such transactions.

Indirect transfer of share regulations — brought in after Vodafone won a transfer-pricing tax dispute with the government — provides for taxing overseas transactions of shares of Indian companies, provided the shares constitute more than 50% of the foreign fund’s total assets (exceeding Rs 10 crore).

Several FPIs and some private equity (PE) funds still face the risk of being taxed in India for indirect transfer of shares of Indian companies because the leeway announced in the budget is available to only certain categories of investors, say experts. Industry trackers are hoping that the government would issue a clarification surrounding the FPIs which have been excluded from the relief.

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