Quick Mail

Please enter your name

Please type your message

Your captcha code looks wrong

Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

Fax : (+91 22) 2351 5275.

Email : [email protected]

Home Articles Taxation         Share :

Budget 2017Chapter C

14. Indirect Transfer – Capital Gain [S. 9(1)(i), Explanation 5A]:

14.1 Indirect transfer provisions were introduced in 2012 to overcome the SC decision in the case of Vodafone. Briefly, Hutchison Hong Kong sold shares of a Cayman island company to Vodafone Netherlands. Through this transaction, Hutchison sold the Indian mobile telecom business “indirectly” and avoided income-tax on the ground that the transaction is for a foreign company’s share outside India and between non-residents. Hence India does not have jurisdiction to tax. The tax department raised a demand of US$ 2 billion. The Supreme Court ruled in favour of Vodafone. Kindly see our detailed note available at the following link:


14.2 The amendments in the law to overcome the Vodafone decision provided that if the foreign entity derives substantial value from India, then the share or interest in the foreign entity will be considered to be “in India”. Thus if Indian assets are sold indirectly through foreign entities, the gain will be taxable in India. The amendments however had some unintended consequences / concerns. For example: “How should substantial value be determined?” “How much is substantial value?” “Will even small shareholders be taxed if they sell shares on stock exchange abroad?” “Will dividend declared by the foreign company to foreign shareholders also be taxed?”.

Some of these were resolved in 2015 and 2016 by further amendments in the law and issue of rules. Substantial value has been explained to mean that if the foreign company derives its value from assets in India exceeding Rs. 10 cr. and forms 50% or more of the total value of its global assets, substantial value will be considered as in India. Similarly shareholders holding less than 5% interest in the foreign company and who do not have management rights, will be exempt from Indirect transfer provisions.

14.3 In 2015, CBDT issued a circular (No. 4 dated 26.3.2015) stating that indirect transfer provisions are deeming provisions. They have to be interpreted strictly. The provisions apply to transfer (sale). These do not apply to dividends. Thus if foreign company declares dividend to foreign shareholders, the same will not be taxable in India.

14.4 One of the issues is – if there is a multi-level structure through which shares in an Indian company are held, will it give rise to multiple taxation? For example, Foreign company 1 (FCO1) holds shares in FCO2; FCO2 holds shares in FCO3; and FCO3 holds shares in Indian company. If FCO1 sells shares in FCO2, it will be taxed in India. When FCO2 sells shares in FCO3, again it will be taxed.

14.4.1 Various representations were made. CBDT issued a circular (No. 41 of 2016) essentially stating the law. In vertical structures, there will be multiple taxation.

14.4.2 Again the investors represented. The Finance Bill now provides that in case of FIIs which are registered as category 1 or category 2 with SEBI, investors in those FIIs will not be taxed when they sell their investment in the FII. Thus in case of FIIs, there will be one tax when the FII sells the shares. There will be no further tax when the investor sells the shares/units in the FII. In any case, FIIs largely earn Capital gain on sale of listed shares. Long Term gain on such shares is exempt. It led to a situation where the primary gain is exempt in the hands of FII, but sale of units of the FII by the investor of the FII is taxable. This situation has now been resolved.

14.4.3 However in case of other foreign investors – e.g. Venture Capital funds, Private Equity investors, etc. multiple tax remains. All investors in the structure where ultimately the value is substantially from India, remain taxable.

14.5 The amendment is proposed from 1st April 2012 (when indirect tax provisions were enacted). However the indirect tax provisions have been made applicable from 1.4.1961. Hence the exemption to investors in FIIs also will be applicable from 1.4.1961.

14.6 This has been our suggestion even before. We re-emphasise, that multiple level structures will not be useful. On the contrary they may cause harm. It is better to hold investments directly than through intermediate structures.