Direct tax body clarifies indirect transfer provisions

The Central Board of Direct Taxes (CBDT) released a clarification via a circular on 7 November on the applicability of indirect transfer provisions (ITP) on non-resident investors on account of redemption/buyback of shares/interest held indirectly (through upstream entities registered/set up outside India) in certain specified Indian investment funds. Such specified Indian investment funds include (1) an investment fund as defined in section 115UB of the Income Tax Act (ITA); or (2) a venture capital company or a venture capital fund as defined in section 10(23FB) of the ITA.

Explanation 5 of section 9(1) (i) of the ITA provides that shares/interest in a foreign company, which derives its value substantially from assets located in India should be deemed to be situated in India. Accordingly, capital gains arising out of transfer of shares/interest in a foreign company which derives its value substantially from assets located in India should be subject to capital gains tax in India.

Private equity, venture capital and other fund managers have raised various concerns in relation to the applicability of ITP on non-resident funds investing in India through multi-tier investment structures resulting in multiple taxation of the same income in case of up-streaming the income pursuant to redemption/buyback of shares/interest held indirectly in the specified fund.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.