In 2012 the Income Tax Act (ITA) was amended to tax transfer
of shares or interest in a foreign entity deriving its value substantially from
Indian assets. This amendment adversely impacted the fund industry because the
investors of India based funds located abroad were subject to tax on transfer
of their shares in such funds. It is heartening to note that the government has
finally agreed not to tax the capital gains earned by investors abroad on transfer
of their shares in India based funds. In addition, for multi-tier structures
redemption in Indian market and upstream distribution of the redemption
proceeds will not be subject to tax in India. However, this exemption is
offered only to Category I and II Foreign Portfolio Investors (FPI). But it is
not clear whether Category III FPI, PE and VC investors will get the benefit of
this exemption or not. Further, in spite of this move, certain associated issues
related with such taxation like reorganization, reporting and disclosure still continue
to be the areas of concern.In 2012,
Income-tax Act was amended to provide for taxation of those transactions of
transfer of shares or interest in a foreign entity deriving its value
substantially from Indian assets. Apprehensions have been raised about some
difficulties which arise because of this provision in case of transfer of stake
of investors of India-based funds located abroad but investing in India-based
companies. In 2012, Income-tax Act was amended to provide for taxation of those
transactions of transfer of shares or interest in a foreign entity deriving its
value substantially from Indian assets. Apprehensions have been raised about
some difficulties which arise because of this provision in case of transfer of
stake of investors of India-based funds located abroad but investing in
India-based companies.
A new regime was created under section 9A of ITA to promote
fund management activity in India. However, this regime did not pick up due to
onerous conditions like minimum number of investor (broad based criteria), minimum
corpus (INR 1 billion), restriction on investment in a single entity (not to
exceed 20% of the corpus), arms-length fee etc. Now, there is a proposal to remove
the requirement for a fund to consistently maintain a minimum corpus of at
least INR 1 billion in case the fund is wound up during the previous year. However,
the other onerous conditions continue to remain and therefore the use of this
regime is unlikely to pick-up.
It has been a long pending demand of the industry to provide
a single window registration for Foreign Portfolio Investors. Now, it is
proposed that application for registration, demat account and PAN will be
handled through a common application form. Though different variants of this
has been tried in the past, the new proposal will ease the administrative
burden at the initial stage.
The proposal to allow the listing of Security Receipts (SR)
issued by asset reconstruction companies (ARC) will induce much needed
liquidity in this industry. Currently, the pool of investors in SR is
restricted to qualified buyers (i.e. financial institutions, insurance
companies and FPI), it is not clear whether this pool will be expanded or not.
It is expected that the regulatory framework and the operational guidelines to
implement this proposal will be expedited by SEBI.
Another relevant budget provision is to allow certain systemically
important NBFCs to participate in IPOs as qualified institutional buyers (QIB)
will bring in one more investor category to sustain an IPO market and should give
a boost to capital market. It is not clear whether these NBFCs will be allowed
to participate in other QIB related issuances.
There is also the usual mention of disinvestment policy and
PSU listing. However, it is difficult to comprehend the long-term policy on PSU
listing and disinvestment since there is hardly any action taken on it so far.
Though there are conscious efforts to move towards market economy but there
seems to be reluctance on the part of the government to let go of their control
on the PSUs.
Further, the proposal to link individual demat accounts with
Aadhar is one more step towards creating an integrated information system. May
be it’s time to analyse the possibility of switching to a single card for all
government related transactions.
Some of these proposals are either a continuation of earlier
policies (like listing of PSUs) or are meant to rectify a situation created by
earlier amendment. In 2012, Income-tax
Act was amended to provide for taxation of those transactions of transfer of
shares or interest in a foreign entity deriving its value substantially from
Indian assets. Apprehensions have been raised about some difficulties which
arise because of this provision in case of transfer of stake of investors of
India-based funds located abroad but investing in India-based companies.
169. In order to remove this difficulty, I propose to exempt Foreign Portfolio
Investor (FPI) Category I & II from indirect transfer provision. I also
propose to issue a clarification that indirect transfer provision shall not
apply in case of redemption of shares or interests outside India as a result of
or arising out of redemption or sale of investment in India which is chargeable
to tax in India. In 2012, Income-tax Act was amended to provide for taxation of
those transactions of transfer of shares or interest in a foreign entity
deriving its value substantially from Indian assets. Apprehensions have been
raised about some difficulties which arise because of this provision in case of
transfer of stake of investors of India-based funds located abroad but
investing in India-based companies.
169. In order to remove this difficulty, I propose to exempt Foreign Portfolio
Investor (FPI) Category I & II from indirect transfer provision. I also
propose to issue a clarification that indirect transfer provision shall not
apply in case of redemption of shares or interests outside India as a result of
or arising out of redemption or sale of investment in India which is chargeable
to tax in India. In 2012, Income-tax Act was amended to provide for taxation of
those transactions of transfer of shares or interest in a foreign entity
deriving its value substantially from Indian assets. Apprehensions have been
raised about some difficulties which arise because of this provision in case of
transfer of stake of investors of India-based funds located abroad but investing
in India-based companies.
169. In order to remove this difficulty, I propose to exempt Foreign Portfolio
Investor (FPI) Category I & II from indirect transfer provision. I also
propose to issue a clarification that indirect transfer provision shall not apply
in case of redemption of shares or interests outside India as a result of or
arising out of redemption or sale of investment in India which is chargeable to
tax in India. In 2012, Income-tax Act was amended to provide for taxation of
those transactions of transfer of shares or interest in a foreign entity
deriving its value substantially from Indian assets. Apprehensions have been
raised about some difficulties which arise because of this provision in case of
transfer of stake of investors of India-based funds located abroad but
investing in India-based companies.
169. In order to remove this difficulty, I propose to exempt Foreign Portfolio
Investor (FPI) Category I & II from indirect transfer provision. I also
propose to issue a clarification that indirect transfer provision shall not
apply in case of redemption of shares or interests outside India as a result of
or arising out of redemption or sale of investment in India which is chargeable
to tax in India. In 2012, Income-tax Act was amended to provide for taxation of
those transactions of transfer of shares or interest in a foreign entity
deriving its value substantially from Indian assets. Apprehensions have been
raised about some difficulties which arise because of this provision in case of
transfer of stake of investors of India-based funds located abroad but
investing in India-based companies.
169. In order to remove this difficulty, I propose to exempt Foreign Portfolio
Investor (FPI) Category I & II from indirect transfer provision. I also propose
to issue a clarification that indirect transfer provision shall not apply in
case of redemption of shares or interests outside India as a result of or
arising out of redemption or sale of investment in India which is chargeable to
tax in India.The proposals w.r.t. ease of doing business are not significant
or are only relevant at the initial stage. The ease of doing business should
also be incorporated in the activities carried on to run the business after the
registration.
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