Hun­dreds of FPIs Still Face Risk of a Big Tax on Over­seas Share Deals Ex­emp­tion from in­di­rect trans­fer of shares pro­vi­sion ap­pli­ca­ble only to in­vestors in cat­e­gories 1 & 2

The Economic Times - - Com­pa­nies: Pur­suit Of Profit - Sachin.Dave@ times­group.com

Mum­bai: Hun­dreds of for­eign port­fo­lio in­vestors (FPIs) and some pri­vate eq­uity funds still face the risk of be­ing taxed in In­dia for in­di­rect trans­fer of shares of In­dian com­pa­nies be­cause the lee­way an­nounced in the Bud­get is avail­able to only cer­tain cat­e­gories of in­vestors, tax ex­perts said.

In­di­rect trans­fer of share reg­u­la­tions — brought in af­ter Voda­fone won a trans­fer-pric­ing tax dis­pute with the gov­ern­ment — pro­vides for tax­ing over­seas trans­ac­tions of shares of In­dian com­pa­nies, pro­vided the shares con­sti­tute more than 50% of the for­eign fund’s to­tal as­sets (ex­ceed­ing ₹ 10 crore). The gov­ern­ment in the Bud­get gave a lee­way to cat­e­gory 1 and cat­e­gory 2 for­eign port­fo­lio in­vestors (FPIs), which also means that all other for­eign in­vestors could still face 10% to 40% tax on such trans­ac­tions.

“In­di­rect trans­fer pro­vi­sions were never in­tended to ap­ply to funds; how­ever, the lan­guage of the pro­vi­sion is un­for­tu­nately too wide and even af­ter the amend­ment pro­posed in this bud­get, would rope in a large num­ber of FPIs, as they don't fall un­der ei­ther cat­e­gory 1 or 2 as de­fined,” said Ke­tan Dalal,

se­nior tax part­ner at PwC.

Ra­jesh H Gandhi, part­ner at Deloitte Hask­ins & Sells, said all un­reg­u­lated funds that have less than 20 in­vestors such as fam­ily houses, cer­tain hedge funds and un­reg­u­lated funds man­aged by NRIs would still be cov­ered un­der in­di­rect trans­fer of shares pro­vi­sions.

In­dus­try track­ers said there are about 900 such funds, in­clud­ing some raised by In­dian banks.

Peo­ple in the know also said funds man­aged by two of the largest In­dian banks and an­other fund launched by a fi­nan­cial ser­vices firm also face the risk of get­ting taxed on their trans­ac­tions. “Cat­e­gory 3 FPI flows may not be sig­nif­i­cant com­pared to cat­e­gories 1 and 2, but still has funds and other

pri­vate en­ti­ties that don’t meet the broad based/reg­u­lated cri­te­ria as de­fined, and these could have mul­ti­tiered struc­tures too, and po­ten­tially still hit by the in­di­rect trans­fer tax is­sue,” said Sameer Gupta, tax leader, fi­nan­cial ser­vices, at EY. Many pri­vate eq­uity funds, too, are con­cerned over whether they would be taxed un­der the pro­vi­sions. In­dus­try track­ers say that as the rules stand to­day, pri­vate eq­uity funds have not been ex­empted. “There are con­cerns whether trans­fer / re­demp­tion in pri­vate eq­uity funds at the off­shore level would be cov­ered un­der in­di­rect trans­fer pro­vi­sions and get tax ex­posed,” said Dalal of PwC.

This could mean that a do­mes­tic pri­vate eq­uity fund that has de­ployed 50% or more of its money in In­dia can face this tax if it sells its port­fo­lio to any buyer who is not lo­cated in the coun­try.

The tax rate could be 10-20% on long term cap­i­tal gains and higher at 30-40% on short term cap­i­tal gains as per cur­rent law.

In­dus­try track­ers are hop­ing that the gov­ern­ment would is­sue a clar­i­fi­ca­tion sur­round­ing the FPIs which have been ex­cluded from the re­lief. “The fi­nance min­is­ter did men­tion in his speech about pro­vid­ing a clar­i­fi­ca­tion on non-tax­a­tion in case of re­demp­tion of shares/in­ter­ests out­side In­dia as a re­sult of/aris­ing from re­demp­tion/sale of in­vest­ments in In­dia charge­able to tax in In­dia, one would think there­fore clar­i­fi­ca­tions to ad­dress cat­e­gory III struc­tures should come by way of is­suance of cir­cu­lar and we will have to wait for that,” said Gupta. Some fund man­agers of In­dian ori­gin whose funds face the risk are look­ing to ap­proach the gov­ern­ment along with some in­dus­try rep­re­sen­ta­tives within a week.

Funds man­aged by two of In­dia’s largest banks and an­other launched by a fi­nan­cial ser­vices firm may face tax on their in­vest­ments

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