India moves forward on taxation of indirect transfer

By Ashish Bairagra, PeriGrow Consulting

Since 2012, India has been levying tax on transactions which involve transfer of shares or interest in a foreign entity, if it derives its value substantially from assets located in India (the Vodafone controversy). However, there was ambiguity about the term substantially.

Recent amendments in the Finance Bill 2015 propose substantially to mean:

(i) When the value of assets (whether tangible or intangible) situated in India exceeds INR 100 million and comprises at least 50% of the value of total assets of the company as on the valuation date (without reduction of any liabilities).

(ii) Valuation date shall be the last day of the accounting period preceding the date of transfer or the date of transfer if valuation has increased by 15% or more since then.

(iii) The manner for determining the fair market value of the Indian assets vis-à-vis global assets shall be prescribed in the rules.

(iv) The taxation of gains will be on a proportionate basis and the method for determining this proportionality is proposed to be provided
in the rules.

Exceptions are provided to nonresidents who directly or indirectly hold fewer than 5% of the shares in the foreign entity being transferred and to cases of amalgamation and demergers if these are not taxable in the foreign country as well.

The new provision also casts an obligation on the Indian entity to furnish information failing which penalty can be levied, as under:

(i) 2% of the value of the transaction in respect of which such failure has taken place, if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian entity;

(ii) INR 500,000 in any other case.

Ashish Bairagra, Director
PeriGrow Consulting Private Limited, Mumbai, India
T: +91 98 194 33 693
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PeriGrow brings pace, agility and results to its clients and is committed to make “doing business in India” a better experience, not only for Indian companies but also for global companies with an Indian footprint. The firm partners with clients and provides strategy, growth, compliance and assurance services to develop “Actionable strategies. sustainable results”, as it supports them through the journey of perennial growth.

Ashish is a Director of PeriGrow Consulting Private Limited and specialises in Global Tax Advisory, M&A and Growth Strategy.

published: April 2015

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