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
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