MUMBAI: The Centre clarified that foreign portfolio investors (FPIs) would not have to pay tax in India for assets sold overseas even if the underlying value is derived from Indian assets, providing a breather to such entities.
While presenting the Union Budget 2017-18, Finance Minister Arun Jaitley clarified that the indirect transfer provision of the Income Tax Act that was introduced in 2012 would not be applicable on such foreign investors.
“In 2012, Income-tax Act was amended to provide for taxation of those transactions of transfer of shares or interest in a foreign entity deriving its value substantially from Indian assets. Apprehensions have been raised about some difficulties which arise because of this provision in case of transfer of stake of investors of India-based funds located abroad but investing in India-based companies,” Mr. Jaitley said while presenting the Union Budget 2017-18.
He added that Category I and II FPIs would be exempt from this provision.
Incidentally, the provision was introduced to deal with cases like Vodafone wherein the telecom major acquired the business of Hutchison Essar but refused to pay any tax in India since the acquisition was done overseas. Tax authorities issued a notice to Vodafone on grounds that the value of the transaction was derived from assets in India.
Investor clarity
Amendments made in the Act, however, led to ambiguity on whether FPIs would also be subjected to such tax if a fund is sold overseas with the underlying shares held in Indian companies. The Budget speech has provided the much-needed clarity to foreign investors.
“If the market reaction was the indicator, FPIs appear to be a happy lot,” said Pranay Bhatia, Partner – Direct Tax, BDO India. “With specific carve out for FPIs, the amendment will not benefit other private equity and venture capital investments in India. Therefore, indirect transfer provisions, in the proposed form, continue to apply to funds other than registered FPIs,” he said.
Operational efficiencies
As part of his attempts to reform the financial sector and boost ease of doing business, the Finance Minister said that the process of registration of financial market intermediaries like mutual funds, brokers and portfolio managers among others will be made fully online by the Securities and Exchange Board of India (SEBI).
Further, a common application form for registration, opening of bank and demat accounts, and issue of Permanent Account Number (PAN) will be introduced for FPIs. In this regard, SEBI along with the Reserve Bank of India (RBI) and Central Board of Direct Taxes (CBDT) will jointly put in place the required systems and procedures.
Steps will be taken to link individual demat accounts with Aadhar. The commodities and securities derivative markets will also be further integrated by integrating the participants, brokers, and operational frameworks.
Also, systemically important non-banking financial companies (NBFCs) regulated by RBI and above a certain net worth will be categorised as qualified institutional buyers (QIBs) so as to allow them to participate in initial public offers (IPOs).
