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Changing the Landscape of Indirect Transfers
The Government of India made certain far reaching amendments to Income-tax Act 1961, addressed to situations where transfers took place exclusively between non-resident, hence indirectly, involving underlying assets in India. Although this amendment was made by the Finance Act 2012, it became effective retrospectively as of 1 April 1962. Taxand India and Taxand Mauritius explore the recommendations of the Expert Committee on indirect transfers.
In order to tax indirect transfers in India, the Finance Act, 2012 inserted the following 'clarificatory explanations' to various sections under the Act:
- Explanation to the definition of 'capital asset' under Section 2(14) of the Act.
- Explanation to the definition of 'transfer' under Section 2(47) of the Act.
- Explanation of the term 'through' as appearing in Section 9 of the Act.
- Explanation to the phrase 'capital asset situated in India' as appearing in Section 9.
The Expert Committee has recommended, partly based on these explanantions, that retrospective amendments to tax law should occur in exceptional or rarest of rare cases. They stated that in a case where the retrospective nature of the amendments is proceeded with, no burden ought to be fixed on the payer for not withholding taxes since the same would result in 'impossibility of performance'.
At the very outset, the observations of the Expert Committee that the provisions relating to the taxation of indirect transfers are not clarificatory and instead they are a clear definition to widen the tax base and therefore should apply prospectively.
On the whole the Expert Committee's recommendations are welcomed by businesses operating in India. However there are still certain ambiguities on account of the provisions for taxing indirect transfers which have not been addressed. These include whether or not the holding period of shares needs to be considered, clarification regarding the cost of acquisition, clarification of gift taxation etc.