India: India's Tax Regulator Issues Press Release, Keeps In Abeyance Clarifications On Indirect Transfer

  • CBDT had recently, in December 2016, released a circular containing clarifications on questions raised by stakeholders on various issues relating to indirect transfer provisions, particularly in the context of offshore funds and FPIs.
  • Within less than a month of issuance of the clarifications, CBDT has issued a press release stating that pending further decision, the circular is being kept in abeyance.
  • Decision taken to consider stakeholders' concerns of multiple taxation of the same income.

Recently, on December 21, 2016, the Central Board of Direct Taxes ("CBDT") released a circular1 ("Circular") containing responses to questions raised by various stakeholders (including foreign portfolio investors ("FPIs"), foreign institutional investors ("FIIs") and venture capital funds ("VCFs") etc.) in the context of the applicability of the indirect transfer provisions under the Indian Income Tax Act, 1961 ("ITA"). Pursuant to the issuance of the Circular, the CBDT received representations from such stakeholders regarding the operation of the Circular, especially as to how it does not address the issue of possible multiple taxation of the same income. Since the CBDT is considering and examining the representations made, it has, on January 17, 2017, issued a press release2 ("Press Release") declaring its decision to keep in abeyance the operation of the Circular "for the time being".

Background

On June 15, 2016, the CBDT had constituted a working group to examine the issues raised by stakeholders with respect to the indirect transfer provisions added in the Indian tax rules in 2012. After considering the comments of the working group, the CBDT, through the Circular, issued clarifications on the concerns raised in the format of answers to frequently asked questions ("FAQs").

While you can find a detailed analysis of the Circular here, in brief, the Circular contained responses to queries on the indirect transfer provisions in a number of different contexts such as redemptions by offshore funds registered as FPIs, master-feeder structures, corporate reorganisations etc. While the expectation was that the Circular would examine the practical problems being faced by stakeholders and propose rectifications to the indirect transfer provisions or, at least, relax the rigours arising from a mechanical application of the existing provisions, the Circular instead confined itself to an excessively literal interpretation and provided little guidance to stakeholders.

Upon tracing the history of the indirect transfer provisions in India, it can be surmised that the genesis lay in seeking to tax income on transfer of assets deriving substantial value from Indian assets although the Indian assets may not themselves have been transferred (and therefore no capital gains tax could be imposed on such transfers). However, unfortunately, the language of the indirect transfer provisions is such that even if tax has been paid in India on gains arising from a transfer, upstreaming of such gains can again be potentially made liable to taxation. The Circular, by sticking to a literal interpretation, re-emphasised this possibility of multiple levels of taxation on the same income, while at the same time overlooking the potentially increased risk of litigation and related tax uncertainty.

The Press Release

Through the Press Release, the CBDT has communicated that it has received representations from various stakeholders, including FPIs, FIIs and VCFs after the issuance of the Circular. Further, the Press Release states that the stakeholders have represented that the Circular does not address the issue of possible multiple taxation of the same income. The representations made are currently under examination and consideration. Therefore, pending a decision in the matter, the Press Release clarifies that the operation of the Circular has been kept in abeyance for the time being.

Conclusion

The announcement by the CBDT through the Press Release is a welcome step. It is heartening to see that cognizance has been taken of the issues raised by the stakeholders. There appears to be a tacit acceptance that the Circular did not provide guidance to the extent that it intended to.

The Press Release states that the Circular has been kept in abeyance "pending a decision in the matter". Hence, it can be expected that a definitive step will be taken towards resolution of the issues raised in the Circular. It is possible that such resolution may also be in the form of amendments to the ITA through the Budget, with the Budget speech scheduled to be delivered soon on February 1, 2017. Accordingly, the CBDT might modify the Circular and operationalise it with a suitably amended scope and application.

While the Press Release only refers to the issue of possible multiple taxation of the same income, which is the most important issue brought to light by the CBDT's clarifications, it is hoped that a comprehensive relook on indirect transfer provisions will be taken. Accordingly, even other issues, such as (i) anomalies arising out of valuation as of a prescribed 'specified date' (which might be different from the date of transfer); (ii) extension of exemptions upon corporate reorganisations all the way up to the ultimate shareholders; and (iii) excessive compliance burden imposed by reporting obligations under the Income Tax Rules, 1962, should also be addressed.

The industry keenly awaits the next steps to be taken by the Government in approaching the issues raised by the indirect transfer provisions. Positive moves by the Government in this regard, especially through the Budget, will go a long way in reinforcing its seriousness in promoting the 'ease of doing business' and in marketing India as an investment destination. That being said, as with most things tax, here as well, the devil will most surely lie in the details.

Footnotes

1. Circular No.41 of 2016

2. Press release dated January 17, 2017 titled "Clarification on Indirect Transfer provision under the Income Tax Act, 1961" issued by the CBDT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions