New Delhi: The finance ministry has put on hold a controversial circular which asked fund managers to withhold and pay taxes when investors make a profit by selling units in offshore vehicles if half or more of the investment is in Indian securities.
The tax circular had risen from the controversial retrospective amendment in the I-T Act to tax Vodafone in 2012. “After the issue of the circular, representations have been received from various FPIs, FIIs, VCFs and other stakeholders. The stakeholders have presented their concerns stating that the circular does not address the issue of possible multiple taxations of the same income,” said finance ministry.
It said that 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,” said the finance ministry.
The tax proposal had risen from Vodafone tax case where the finance ministry had lost the case in the courts. The ministry wanted to tax Vodafone as the company had not withheld tax which was payable by Hutchison on profit earned by selling its Indian telecom subsidiary to the UK firm.
After that the UPA government brought a retrospective amendment in I-T Act which said that any financial interest outside India would be deemed to be Indian if it derived a substantial part of its value from assets in India.
Earlier, taxes were applicable on mergers and acquisitions taking place abroad but having a substantial interest in India. However, the circular issued in December 2016 made the tax applicable to investment vehicles.
The new provisions said that if the shares of an Indian firm held by a fund constituted more than 50 per cent of the total assets and the value of the holding exceeded `10 crore, the transaction would be taxed in India under the indirect transfer rules.
Nangia & Co partner Amit Agarwal said FPIs are a highly sensitive breed of investments and the circular had brought in more apprehensions than clarity. “The withdrawal of the circular is indeed welcome. The consultative process adopted by the government too deserves appreciation,” he said.
The December 21 circular contained responses to questions raised by various stakeholders in the context of the applicability of the indirect transfer provisions under the I-T Act. While the circular was intended to provide clarity in which the indirect transfer provisions are to be applied, it fails to address the concerns of various stakeholders with regard to issues like potential double taxation, onerous compliance requirements, and lack of tax neutral
foreign corporate restructuring.