Union Budget 2015-16 India Suggestion : FM to set limit for taxing indirect share transfer by MNCs

Government is likely to define in the forthcoming budget the term ‘substantial value’ to tax MNCs for selling Indian operations by fixing 50 percent of their total asset base as the threshold.

Seeking to bring about clarity in taxation of indirect transfer of assets by MNCs, Finance Minister Arun Jaitley is likely to introduce the threshold to establish whether a overseas company has substantial business interest in India. Following the retrospective amendment to Income Tax Act in the wake of the Vodafone-Hutchison tax controversy, a company incorporated overseas is deemed to be situated in India only if it derives its “value substantially” from assets located within this country.

As the term “value substantially” is not defined, it has led to a significant subjectivity, uncertainty and litigation, tax experts said. The minister is likely to clarify the provisions in the Budget as it has become a sore point for foreign investors, they added. According to sources, the Finance Ministry is looking at introducing the threshold — 50 per cent of MNCs’ total asset base in India — for taxing indirect transfer of assets, which is in line with the recommendations of the Shome Committee.

The Parthasarathi Shome Committee, which has looked into the issue, has suggested that the government should introduce a 50 per cent threshold to bring about clarity with regard to taxation of indirect transfer of shares. The revised Direct Taxes Code (DTC) 2013 has provided for a 20 per cent as the threshold for triggering tax on indirect transfers of assets. “One of the key concerns of the foreign investors in respect of indirect transfer of shares is the lack of clarity as to what constitutes substantial value of assets situated in India.

Therefore, it is critical that government clarifies its position in this year’s Budget,” KPMG (India) Partner Tax Vikas Vasal said. The uncertainty over threshold has impacted the global acquisitions and group restructuring transactions (involving merger, demergers, business sale etc) wherein the shares of Indian company are also involved, said Gokul Chaudhri Leader (Direct Tax) BMR & Associates. “The investors are fearful of the prolonged litigation that could follow in view of multiple interpretations,” he added.

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