Budget 2013 Indirect Transfers: Taxing Times To Continue?

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Published on Mon, Feb 18,2013 | 16:22, Updated at Mon, Feb 18 at 16:22Source : Moneycontrol.com

By: Sudhir Nayak, Partner, Sudit Parekh & Co.

Past experience shows that once in a decade or two, we witness a historical tax ruling from the Supreme Court which evokes sharply divided responses amongst various stakeholders in the tax community. The Supreme Court ruling in the case of Vodafone Holdings BV is one such landmark ruling. The Supreme Court judges were lauded by taxpayers across the globe for rendering a well reasoned ruling propagating a stable tax regime. However, the hard earned victory earned by Vodafone was short lived as last year, the Indian Legislature wielded its authority to virtually nullify the ruling and bring income arising from transfer of shares of foreign companies within the ambit of Indian taxation in certain cases. The same is popularly denoted as 'taxability of indirect transfers'.

This amendment created a huge furor in the global investor community and threatened to adversely impact India's status as a preferred investment jurisdiction amongst the developing countries. The main concerns of the investor community were (i) the fear that the retrospective amendments dating back to 50 years or more would create tax uncertainty over Indian investments; (ii) the seeming desire of Legislature to negate tax jurisprudence; and (iii) ambiguous tax provisions.

This amendment coupled with introduction of General Anti Avoidance Rule ('GAAR') provisions resulted in capital outflows from the country on account of weak investor sentiments who sought other stable tax jurisdictions.

The concept of taxability of indirect transfers in India has been the subject matter of debate in India for close to four years now with the tax authorities seeking to pierce the legal forms of transactions to evaluate substance therein. With a view to introduce these provisions in the tax laws itself, the Legislature 'provided certain clarifications' within section 9 of the Act to tax 'indirect transfers'. The mode of computing the gains on such indirect transfers and manner of taxability of the same was so ambiguous and complicatedly worded that the uncertainty revolving around these provisions only stood enhanced.

With a view to pacify investor sentiments and foster investor confidence, the Indian Government subsequently constituted a committee ('Shome Committee') to look into the GAAR provisions as well as the indirect transfer provisions. The report of the Shome Committee suggested rationalization of the GAAR provisions and suggested a form of provisions which may be more acceptable to the global investor community since it breathes of equitability and stability. The positive manner in which the recommendations of the Shome Committee have been viewed by the Indian Government (and the new Finance Minister in particular) and the subsequent deferral of GAAR provisions has been well received globally.

The positive sounding statements of the Indian Finance Minister on global forums in the past few weeks and the assertion that India is a stable jurisdiction awaken a hope that the recommendations of the Shome Committee in the context of indirect transfers would also be viewed favourably by the Government.