Budget 2017-18: Government proposes to exempt FPIs from indirect transfer provision

Seeking to assuage concerns of overseas investors, the government on Wednesday announced relief for well-regulated FPIs from tax liability arising out of sale of assets or shares in a foreign company due to redemption of an investment within India.

Presenting the Budget in Parliament, Finance Minister Arun Jaitley proposed that category I and II foreign portfolio investors (FPIs) should be exempted from taxation on indirect transfers.

“In 2012, the Income-Tax Act was amended to provide for taxation of those transactions of transfer of shares or interest in a foreign entity deriving its value substantially from Indian assets,” Jaitley said.

“Apprehensions have been raised about some difficulties which arise because of this provision in case of transfer of stake of investors of India-based funds located abroad, but investing in India-based companies,” he added.

In order to remove this difficulty, Jaitley has proposed to exempt FPI category I and II from the indirect transfer provision.

“I also propose to issue a clarification that indirect transfer provision shall not apply in the case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India,” he said.

Category I FPIs include sovereign wealth funds and central banks and category II includes mutual funds and banks.  However, hedge funds, individuals and other high-risk foreign investors will not get this relief.

Pranay Bhatia, Partner, Direct Tax at BDO India, said the proposed amendment to the law would set at rest apprehensions of foreign investors.

Last month, the tax department had kept in abeyance its recent circular on indirect transfer of shares by foreign investors, who were wary of multiple taxation. The move came after CBDT received representations from various FPIs, FIIs, venture capital funds and other stakeholders.