following are the retrospective amendment of 2012 in respect of indirect transfer under the purview of international transaction head of income tax. The Supreme Court in the case of Vodafone International Holdings B. V. held that the transfer by a non-resident to another nonresident, of shares of a foreign company holding an Indian subsidiary Company does not amount to transfer of any capital asset situated in India. Accordingly, the gains arising from the said transaction were not liable to tax in India. • Subsequently, the Finance Act, 2012 amended the Income-tax provisions and consequently the income deemed to be accruing or arising to non-residents directly or indirectly through the transfer of a capital asset situated in India is to be taxed in India with retrospective effect from 1st April, 1962. The widening impact of retroactive amendments are: Retrospective applicability of amendments is a controversial issue and as per international best practices, resort to retrospective amendments in other countries is made only in the rarest of the rare cases. Certainty in taxation is a key driver for India’s investment climate. Retro-active amendments have a negative impact on investor confidence. Retrospective overruling of judicial precedents favouring taxpayers potentially undermines rule of law in India. Concerns over the impact of retro-active amendments knowledged by the PrimeMinister as well as the Finance Minister in 2012. Circular F. No. 500/111/2009-FTD-I dated 29th May, 2012 clarifies that cases where assessment proceedings under Section 143(3) have been completed prior to 1st April 2012, will not be reopened on account of the retrospective amendments.With the retro-active amendments, tax officers have targeted various companies–who had done any restructuring which has an Indian leg.There was a widespread expectation that the new Government will do away with the retroactive amendments regarding indirect transfer. But that did not happen, given the legislature implications. The Finance Minister, however,took the middle path to resolve the contentious issue.Though the provisions regarding taxation of indirect transfer of shares would continue, the Finance Minister could have provided certain clarity or relief in respect of the following: Functioning of the Committee–whether the Committee would only implement the law regarding indirect transfer or it can take certain decision like defining ‘substantial’ interest, etc. Indian tax should not be imposed where the shares of the foreign company are listed and traded on a stock exchange outside India. Only transfer of a controlling interest in a foreign entity deriving its value substantially from assets located in India should attract tax in India. In this regard, a threshold limit of transfer of more than 50 % beneficial interest in the capital of a foreign entity and/or transfer of more than 50% voting power of a foreign entity could have been prescribed to define transfer of a controlling interest. Even in case of a foreign entity deriving its value substantially from assets located in India, only such portion of the gains should be taxable in India as are relatable to Indian assets. No taxes to be levied on group restructurings wherein the ultimate parent remains unchanged. No tax to be levied on repatriation of funds by the offshore company/entity to its investors on account of buy back,redemption, capital reduction. No tax to be levied on liquidation by the offshore company to the extent the repatriation amount relates to the amount realised by the offshore company on sale of Indian assets on which taxes have been duly discharged, or on which no taxes or lower taxes are due on account of tax provisions or treaty benefits available, as may be applicable. Transactions which are otherwise not transfer as per law, e.g. gift, or transactions, which do not result in any transfer per se, e.g. primary infusion in company for acquisition of shares, should not be covered in the deeming fiction created by amending the Section 2(47) of the Act. increasing the administration and taxation of direct and indirect capital gains derived by nonresidents. • As per the Circular, in case the tax rate of the country where the overseas transferor is domiciled, is lower than 12.5% or no tax is levied when an overseas investor indirectly transfers the equity of a Chinese resident enterprise, then it should within 30 days upon signing of the equity transfer contract offer certain documents to the competent taxation administration in China. • In case an overseas investor makes indirect transfer of the equity of a Chinese resident enterprise in the forms including abusing organisation without reasonable commercial purpose to dodge the obligation of paying certain enterprise income tax, the competent taxation administration may reconfirm the quality of the equity transfer trading in accordance with the economic substance, to negate the existence of the overseas holding company serving as taxpayer.
Posted on: Fri, 29 Aug 2014 02:57:28 +0000
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