FPIs’ hopes dashed as CBDT in no mood to raise ₹10-crore trigger threshold

The Central Board of Direct Taxes (CBDT) does not seem to be inclined to raise the threshold of ₹10 crore for triggering the applicability of ‘indirect transfer provisions’, popularly known as ‘Vodafone-type’ or ‘retrospective tax’ amendments, under income tax law. This is as per the latest circular on ‘indirect transfer’ provisions issued by CBDT on Tuesday.

To a query from foreign portfolio investors (FPIs) suggesting that the threshold be increased to ₹100 crore, the CBDT circular said that the “₹10-crore threshold is reasonable”. With Budget round the corner, all eyes are now on Finance Minister Arun Jaitley on whether he would look to raise this ₹10-crore threshold to provide relief to FPIs and provide a boost to foreign investments in the country.

The latest CBDT circular has addressed as many as 19 questions raised by foreign investors (mainly FPIs) on the scope of the indirect tax provisions.

For responding to the queries raised by stakeholders, the CBDT had considered the comments of the working group set up on June 15, 2016 to examine the issues raised on ‘indirect transfer’.

Under the current income tax law, for ‘indirect transfer’ provisions to get triggered, the value of assets deemed to have been situated in India on the specified date should have exceeded ₹10 crore and represent at least 50 per cent of the value of all the assets owned by the company/entity.

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said the clarification issued does reaffirm that the monetary threshold of ₹10 crore stated in Income Tax Act holds good with regard to the applicability of provisions of taxation of indirect transfers.

“With the Budget round the corner, one would eagerly wait and watch whether the threshold of ₹10 crore gets revised upwards,” Chawla said.

Prashant Kapoor, Partner — Deal Advisory, M&A Tax, KPMG in India, said the circular has clarified multiple concerns raised by the investor community while considering a strict legal interpretation of the provisions related to indirect transfer. However, some of the practical challenges faced by investors in the PE space have not been addressed.

Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co, a law firm, said it appears from the frequently asked questions (in the circular) that the threshold is not going to be revised upwards.

“Further, the FAQ doesn’t lift or ease off the burden of reporting requirement of an Indian entity for transfer of shares of its foreign shareholder company,” he said.

Amit Agarwal, Partner, Nangia & Co, a CA firm, said CBDT has unequivocally clarified that the threshold limit with respect to taxation of indirect transfer assets is reasonable and is not likely to be reviewed in the near future.