The Firm

Show Timings:

Friday: 10.30 pm, Saturday: 11.30 am

Sunday: 9:30am & 11.00pm


Budget 2013 & Indirect Transfers: Taxing Times To Continue?

Published on Mon, Feb 18,2013 | 16:22, Updated at Tue, Feb 26 at 12:00Source : 

By: Sudhir Nayak, Partner, Sudit Parekh & Co.

Past experience shows that once in a decade or two, we witness a historical tax ruling from the Supreme Court which evokes sharply divided responses amongst various stakeholders in the tax community. The Supreme Court ruling in the case of Vodafone Holdings BV is one such landmark ruling. The Supreme Court judges were lauded by taxpayers across the globe for rendering a well reasoned ruling propagating a stable tax regime. However, the hard earned victory earned by Vodafone was short lived as last year, the Indian Legislature wielded its authority to virtually nullify the ruling and bring income arising from transfer of shares of foreign companies within the ambit of Indian taxation in certain cases.  The same is popularly denoted as ‘taxability of indirect transfers’.     

This amendment created a huge furor in the global investor community and threatened to adversely impact India’s status as a preferred investment jurisdiction amongst the developing countries.  The main concerns of the investor community were (i) the fear that the retrospective amendments dating back to 50 years or more would create tax uncertainty over Indian investments; (ii) the seeming desire of Legislature to negate tax jurisprudence; and (iii) ambiguous tax provisions. 

This amendment coupled with introduction of General Anti Avoidance Rule (‘GAAR’) provisions resulted in capital outflows from the country on account of weak investor sentiments who sought other stable tax jurisdictions. 

The concept of taxability of indirect transfers in India has been the subject matter of debate in India for close to four years now with the tax authorities seeking to pierce the legal forms of transactions to evaluate substance therein.  With a view to introduce these provisions in the tax laws itself, the Legislature ‘provided certain clarifications’ within section 9 of the Act to tax ‘indirect transfers’.  The mode of computing the gains on such indirect transfers and manner of taxability of the same was so ambiguous and complicatedly worded that the uncertainty revolving around these provisions only stood enhanced. 

With a view to pacify investor sentiments and foster investor confidence, the Indian Government subsequently constituted a committee (‘Shome Committee’) to look into the GAAR provisions as well as the indirect transfer provisions. The report of the Shome Committee suggested rationalization of the GAAR provisions and suggested a form of provisions which may be more acceptable to the global investor community since it breathes of equitability and stability.  The positive manner in which the recommendations of the Shome Committee have been viewed by the Indian Government (and the new Finance Minister in particular) and the subsequent deferral of GAAR provisions has been well received globally. 

The positive sounding statements of the Indian Finance Minister on global forums in the past few weeks and the assertion that India is a stable jurisdiction awaken a hope that the recommendations of the Shome Committee in the context of indirect transfers would also be viewed favourably by the Government.

While it is all but impossible to anticipate what the Legislature would agree to in the upcoming Budget 2013, some of the key recommendations of the Shome Committee, which if accepted could foster investor confidence and provide a stable tax regime in India are briefly outlined below:


Key provision



Prospective applicability

The taxability of indirect transfers should apply to future transactions and not have retrospective implications.  It may be advisable to bury the ghosts of past transactions and restructuring exercises rather than allowing them to linger.  The current provisions appear to impose an additional charge of income tax on income which was, hitherto, not taxable in India.  Considering the onerous character of these provisions, the same should be made effective from a prospective date to avoid undue hardship to taxpayers.


Exemption from penal and interest implications

If the recommendation of prospective taxation of indirect transfers is not accepted, a number of past transactions, which were otherwise not be liable to tax in India may now be liable to tax in India.  As a measure of equity, the taxpayers and persons responsible to withhold taxes on such income should be protected from interest and penal consequences since it would not be possible for such persons to have anticipated the ‘clarificatory retrospective amendments’.


Definition of term “substantially”

Presently the Income Tax laws seek to inter alia tax income arising from transfer of shares of a foreign company as such shares derive their value substantially from assets located in India.  The term ‘substantially’ should be suitably defined upfront to avoid any litigation arising on account of varying interpretations of the same by the taxpayers and the revenue authorities.  This may be akin to the provisions of the proposed Direct Tax Code which lay down a threshold of 50% Indian held assets by foreign companies. 


Meaning of term ‘directly or indirectly’

The phrase ‘directly or indirectly’ may be clarified as representing a ‘look through’ approach (which basically implies that, for determination of value of share of a foreign company, all intermediaries between the foreign company and the assets in India may be ignored).  This would provide upfront clarity to the taxpayers rather than increase uncertainty over the number of multi layered structures which are typically adopted by multi national corporations for various commercial reasons. 




Copyright © Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of is prohibited.