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Budget 2014: Foreign stock trade may not attract capital gains tax
June, 26th 2014

The government is looking to encourage Indian companies to raise funds through the sale of depositary receipts overseas by freeing trade in such securities from capital gains tax in the forthcoming budget, which is set to be unveiled on July 10.

Overseas investors who buy and sell stock of companies that are only listed abroad won't be liable for the levy in India once this is implemented, said a senior government official. "The income-tax law would be amended to accommodate the changes in the American and global depository receipts scheme," the official said.

The move will require an amendment in Section 115 AC of the Income-tax Act. Separately, the government is also expected to amend the law to keep share transfers over stock exchanges outside the purview of taxation in the country.

The move could provide a respite to overseas transactions such as Bain Capital's acquisition of Genpact carried out on the New York Stock Exchange. The retrospective amendment making indirect transfers taxable here had raised the spectre of taxation over such deals.

The amendment to Section 9 of the Income-tax Act in 2012 said a foreign asset would deemed to be located in India if it derives, directly or indirectly, its value substantially from the asset located in India, implying that its transfer would be subject to tax.

The provision did not spell out what 'substantially' meant as also 'keep transfers on overseas stock exchanges out of the tax ambit'. The new Narendra Modiled government is committed to a taxpayer-friendly regime and is expected to define both these elements.

The department of economic affairs had been pushing for changes in the ADR/ GDR scheme since it was announced in September 2013 but this ran into the requirement for a change in the law.

Overseas investors may have been wary of such instruments given the retrospective changes in tax laws that were applied to acquisitions of Indian assets by overseas entities, such as the Vodafone-Hutchison deal.

Lack of clarity on taxation has held back companies from pursuing overseas listings, which are seen as an attractive option for companies from sectors such as mining that are better understood in overseas markets.

Moreover, the government has accepted the MS Sahoo panel's recommendations on overhauling the ADR/ GDR scheme. The panel had suggested allowing the issuance of depository receipts against any underlying securitie —debt as well as equity—by listed and unlisted companies to attract long-term capital flows into the country.

It had also favoured level-1, level-2 and unsponsored ADRs, the most liberal form of such securities in terms of regulations, and providing easier access to markets.

The government is also expected to extend the scheme that was launched on a pilot basis for two more years along with other changes in the forthcoming budget. Experts said clarity on taxation would help the scheme become popular.

"The scheme should be attractive enough to draw international investors to issuances by these companies," said Sunil Jain, partner, J Sagar Associates. "Clarity on taxation would help their case." Such a move would also help companies diversify their investor base easily.

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