Threshold Likely for Taxing Indirect Share Transfer by MNCs

New Delhi: The government is likely to define in the forthcoming Budget the term 'substantial value' to tax multi-national companies or MNCs for selling Indian operations by fixing 50 per cent of their total asset base as the threshold, according to sources.

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 an 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 at BMR & Associates.

"The investors are fearful of the prolonged litigation that could follow in view of multiple interpretations," he added.

Mr Vasal said there is a strong view that only such transactions should fall within the ambit of these provisions where more than 50 per cent of the assets of an MNC are situated in India.

Through a retrospective amendment to I-T Act, an indirect transfer of a capital asset was made taxable vide the Finance Act, 2012. Based on this amendment, the I-T department sent notice to Vodafone asking them to pay Rs 20,000 crore due on account of tax, interest and penalty. The matter is pending in international arbitration.

UK-based Vodafone had bought the Indian telecom business of Honk Kong based firm Hutchison, leading to the tax claim by Indian authorities.

In a recent ruling of the Delhi High Court in the case of Copal Research, it has been held that 'substantial' should be read as 'principally' or 'mainly' or at least 'majority' and that 50 per cent is a reasonable threshold.