CBDT retracts circular on indirect tax provisions after FPI representation

18 Jan 2017

The Central Board of Direct Taxes (CBDT) has put on hold a recent circular clarifying the indirect transfer provisions, which had led to retrospective tax cases like that of Vodafone.

The CBDT decision to retract the circular, issued on 21 December 2016, comes after representations made by FIIs, FPIs, VCFs and other stakeholders holding that the circular did not address the issue of possible multiple taxation of income

An official statement from CBDT said the matter is now under consideration.

''Pending a decision in the matter, the operation of the above mentioned circular is kept in abeyance for the time being,'' the CBDT statement said.

The circular had listed 19 instances when indirect tax provisions would come into play. The CBDT had set a threshold of Rs10 crore for value of assets or having at least 50 per cent of the business in India for the trigger of indirect transfer provisions to come into effect and attract tax.

These clarifications, in the form of answers to 19 questions, would have subjected FPIs, especially those with India-focused funds, to greater scrutiny by the income-tax (I-T) department and led to double taxation in many cases.
 
Many foreign investors have made representations to the finance ministry asking the latter to reconsider the circular. They had pointed out that applying these provisions on offshore investors investing in these foreign funds or FPIs would lead to double taxation as they already pay securities transaction tax and tax on capital gains from selling of shares.

FPIs were also keen that the indirect transfer provision trigger should kick in at level of Rs100 crore, as they felt Rs10 crore was too low a sum. Also, PE investors were anxious as the circular failed to address the issue of multiple taxation (double or triple the taxation) in the case of foreign funds.

Indirect transfer provisions were introduced in the I-T act in 2012 with retrospective effect, as the government sought to bring Vodafone Group Plc's $11 billion acquisition of Hutchison Essar Ltd in 2007 (by acquiring a Cayman subsidiary owned by Hutchison International) and other such transactions under the tax net in India.

Indirect transfer provisions deal with taxation of transactions wherein even though the transfer of shares took place overseas, the underlying assets were in India.