GAAR Experts Analyse Retroactive Provisions
A press release issued by the Prime Minister’s Office on July 30, 2012 states that the Prime Minister, has decided to refer the implications of the indirect transfer provisions on Foreign Institutional Investors (‘FIIs’) and portfolio investors to the Expert Committee on the General Anti Avoidance Rule (‘the GAAR Committee’). Taxand India explores this decision in greater depth.
The Finance Act, 2012 has introduced a clarification in the Income-tax Act, 1961 (‘the Act’) that a share / interest in a foreign entity would be deemed to be an asset situated in India if such share / interest substantially derives its value from assets situated in India. Once the share / interest is deemed to be situated in India, income arising through or from such share / interest or from the transfer of such a share / interest would be liable to tax in India. The clarification has been introduced in the Act with retrospective effect from April 1, 1961.
The clarification intends to bring within the Indian taxing net transactions involving an indirect transfer of Indian assets, done in a manner such that the Indian assets get transferred as a result of an overseas transfer of shares in a foreign company from a seller to a buyer. However, the language that is currently used in the clarification inserted in the Act is very wide; it brings within the Indian taxing net a whole host of other types of cross-border transactions, which may not have been originally intended on being taxed in India. This has resulted in various industry groups and interested parties getting concerned about the actual scope and applicability of the clarification.
The referral of the indirect transfer clarifications to the GAAR Committee is a welcome move and should provide much-required clarity on the scope and applicability of the indirect transfer provisions.