In a bid to soothe the nerves of foreign portfolio investors spooked by a fresh tax burden on indirect transfers mooted by the Central Board of Direct Taxes last month, the finance ministry stepped into the picture on Tuesday and put the tax department missive in abeyance till further notice.
The tax department circular issued on December 21 clarified that all foreign portfolio investors (FPIs) with more than 50% of their assets in India and owning over 5% stake in any listed entities would incur tax under India’s indirect transfer provisions. This tax would be levied in addition to the securities transaction tax and short-term capital gains tax and would hurt India-dedicated global investment vehicles more than, say an emerging markets fund that has less than 50% exposure to the Indian market.
“After the issue of the aforementioned circular, representations have been received from various FPIs, FIIs, venture capital funds and other stakeholders,” the finance ministry said in a statement late Tuesday, seeking to calm investor anxiety ahead of the Union Budget.
“The stakeholders have presented their concerns stating that the circular does not address the issue of possible multiple taxation of the same income. The representations made by the stakeholders are currently under consideration and examination. Pending a decision in the matter, the operation of the above mentioned circular is kept in abeyance for the time being,” the ministry said
“This was very much the need of the hour,” Tejas Desai, Partner, Tax & Regulatory Services at EY India said. “The interpretation of the law canvassed by the circular was giving rise to unreasonable and unacceptable outcomes for foreign funds and international investors.”
The Central Board of Direct Taxes circular had revived the bad memories and had created widespread concern amongst the FPI community, said Suresh Swamy, partner - financial services tax at PwC, stressing it had created ‘an unnecessary scare.’ “Hopefully, an appropriate amendment to Section 9(1)(i) in the upcoming budget will put the whole issue of offshore transfer to rest for investors investing in an FPI,” he said.
Mr Desai also said that the government’s decision to put this in abeyance is only a temporary measure.
“The issue doesn’t end here though,” he said. “The Government has only said that they are putting the Circular in abeyance, pending a decision in the matter. The Budget should appropriately clarify the legislative intent of the indirect transfer tax provisions to bring finality to this simmering issue.”
