Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.
By Siri Bulusu
India’s Central Board of Direct Taxation has suspended a notice for taxation of India-focused funds after industry professionals criticized the government for widening the tax net on foreign investments.
Using a list of 19 different investment scenarios, the Dec. 21 circular intended to specify the types of foreign investment instruments that would be taxable under a 2012 amendment to India’s Income Tax Act of 1961, but it instead drew widespread criticism for opening “Pandora’s box” due to its all-encompassing nature.
The 2012 amendment was precipitated by a tax dispute between the Indian government and Vodafone Group. The Indian government argued that a massive transfer of Indian assets from India-based telecommunications company Hutchinson Essar Ltd. to Vodafone Group through a Cayman Islands-based subsidiary should have come under India’s tax jurisdiction, since the purpose of the transaction was to transfer Indian assets.
“The industry felt the clarification opened up various debatable issues because it dealt with the foreign investors operating outside India,” Mumbai-based chartered accountant Vispi T. Patel told Bloomberg BNA in an e-mail Jan. 19 referring to the December circular.
Industry members commented to the Indian government, stating that the legally-binding circular was a punishing measure for those who have made investments into India. Under the various investment scenarios, a fund could technically be taxed multiple times “with no end in sight.”
Patel said by suspending the circular, the government is keeping the matter of foreign investments open for the time being. There are genuine issues the government wants to deliberate before distributing another clarification, he added.
Only the Central Board of Direct Taxation can clarify how the government will actually administer the law, Patel said. “The circular is suspended, but the law is still there on the statute.”
In the Vodafone tax dispute with India’s government, the global telecoms company challenged the tax authority’s demand and the Supreme Court ruled in favor of the company, since at the time India had no legal provision to tax such a transaction.
India then added an amendment—with retrospective applicability up to seven years—to include such offshore transactions and revisit the dispute with Vodafone Group. The new law was written broadly and ended up netting most other foreign portfolio investments.
Until the clarification was issued in December, however, tax officers were mostly lenient on most foreign portfolio investments and foreign indirect investments, keeping with the spirit of the 2012 amendment to crack down on tax evasion.
“There was a disconnect between the industry and the circular,” Patel said. “The government felt it is better to look into each matter the industry has brought forward to understand what they want.”
Changes to India’s taxation of foreign portfolio investments may be announced in upcoming union budget speech, scheduled for Feb. 1.
To contact the reporter on this story: Siri Bulusu in New Delhi at firstname.lastname@example.org
To contact the editor responsible for this story: Penny Sukhraj at email@example.com
The Ministry of Finance notice stating suspension of the circular is at: http://incometaxindia.gov.in/Lists/Press%20Releases/Attachments/585/Press-Release-Clarification-on-Indirect-Transfer-provision-17-01-2017.pdf
The suspended circular meant to clarify taxation of India-focused foreign funds is at: http://www.incometaxindia.gov.in/communications/circular/circular41_2016.pdf
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)