Small equity buys, business recast may stay out of retrospective tax

NEW DELHI: India is considering keeping small equity purchases and business restructuring out of the ambit of the controversial retrospective law to tax indirect transfers of Indian assets by defining a sufficiently high threshold limit.

The new government will decide on the recommendations of the Partho Shome committee, which has suggested a high threshold for taxing indirect acquisitions of Indian assets in deals executed overseas, a finance ministry official said.

"The new government is yet to review Shome committee recommendations. Government will examine and take a decision," Sunil Gupta, joint secretary, (tax policy and legislation), Central Board of Direct Taxes, said at a CII function.



Experts say there is lack of clarity over the definition of ‘substantial value', implication of small shareholders and indirect transfers as a result of business restructuring.

"These issues are under active consideration," Gupta said. He added that the board would soon issue a circular clarifying that all cases after April 1, 2012 would not come to the committee for indirect transfers proposed in the budget.

The erstwhile UPA government had amended the tax laws in 2012 budget retrospectively, allowing tax authorities to tax overseas transactions involving indirect transfers of Indian assets to nullify the Supreme Court decision that said the British telecom operator Vodafone's $11.2-billion acquisition of Hutchison Essar in 2007 was not taxable in India.

The amendment evoked strong reactions from foreign investors as well as domestic industry, prompting the then government to set up a panel under Parthasarathi Shome.

The Shome panel recommended that the amendment should apply prospectively and only on those who make capital gains. The panel, which also looked at taxation of indirect transfer in great details and examined the tax regime in different countries, suggested a comprehensive framework covering foreign institutional investors, private equity and corporate restructuring exercises.


The UPA government did not take a decision on the committee's recommendations. Shome had said "substantially" in the law should be pegged at 50% of the total value derived from assets of the company or entity.

In other words, a capital asset, share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if Indian assets of that entity make up more than 50% of the global assets of such company or entity.

Such a transfer would be subject to tax in India. This high threshold will ensure that small stake changes and global restructuring do not invoke this law, the intent of which is to ensure that companies do not avoid taxes through deals structured overseas.