[26053]
April 17, 2012
TO: INTERNATIONAL OPERATIONS ADVISORY COMMITTEE No. 10-12 RE: ICI/ICI GLOBAL LETTER OPPOSING TAX PROVISIONS IN INDIA FINANCE BILL
ICI and ICI Global sent the attached letter to Indian officials [1] regarding two provisions in the proposed 2012 Finance Bill that could have substantial negative effects on investment companies and their investors. The two provisions involve taxing “indirect transfers” of Indian securities and giving tax officials broad authority to recharacterize or ignore transactions under a General Anti-Avoidance Rule (“GAAR”). The ICI/ICI Global letter seeks clarification regarding the provisions’ scope – through specific identification of the transactions to be covered – and urges than any changes apply only to new investments.
The letter notes that the two provisions apparently were drafted in response to very specific and narrow concerns. The proposed legislative language, however, is sufficiently ambiguous that the provisions may call into question the tax treatment, widely viewed as settled, of common transactions engaged in by highly-regulated, publicly-available investment funds.
The indirect provision apparently was designed to reverse retroactively the decision of the recent Indian Supreme Court in the Vodafone case; this decision effectively held that India could not tax the sale by a non-Indian resident of a non-Indian holding company that owned an Indian company. The indirect transfer provision, absent clarification, could permit Indian authorities to assert tax retroactively against any non-Indian investor who sold shares of a non-Indian fund investing in India.
The GAAR provision reportedly was drafted, in part, to address concerns about investors entering the Indian stock market through a country that has a tax treaty with India that exempts from tax the capital gains realized by its residents. Because the GAAR provision is drafted so broadly, it could permit Indian authorities to assert capital gains tax against investors resident in any country with which India, by treaty, provides a tax exemption. Several other common fact patterns also could be questioned under the GAAR.
The letter explains why investment funds need certainty regarding the tax consequences of their investments. Adoption of the letter’s recommendations would provide investment funds with the certainty they require. The letter concludes by noting that a strong signal is needed – through public statements and revised legislative language – that these two provisions will not impact the settled expectations of investment funds holding Indian securities.
Keith Lawson
Senior Counsel - Tax Law
endnotes
[1] The letter was addressed to the Finance Minister. Copies were sent to officials at the Central Board of Direct Taxes (“CBDT”) and the Securities and Exchange Board of India (“SEBI”).