Q. Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India?
a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
Correct Answer: d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
Question from UPSC Prelims 2022 GS Paper
Explanation :
Indirect Transfers and Taxation in India
The concept of indirect transfers has been a hot topic in India, especially following the landmark Vodafone case. An indirect transfer involves a situation where a foreign entity sells shares that derive their substantial value from assets located in a country different from the entity’s base. The tax implications of such transfers have led to significant debate and regulatory scrutiny.
Direct vs. Indirect Investment
When considering the different types of cross-border transactions, it is essential to distinguish between direct investments and indirect transfers to understand the tax obligations in India:
1. An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment: This represents a direct investment and is not related to the concept of an indirect transfer.
2. A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment: Although this involves a foreign entity, it does not encapsulate the essence of an indirect transfer as the investment is direct.
3. An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases, transferring the proceeds to India: This transaction is a direct international investment and does not involve the transfer of shares that derive their value from assets located in India.
The Case of Indirect Transfers Involving Indian Assets
4. A foreign company transfers shares and such shares derive their substantial value from assets located in India: This scenario is at the heart of the indirect transfer debate. When a foreign company transfers shares of another foreign company, and these shares are substantially valued based on Indian assets, the Indian tax authorities may claim a right to tax the capital gains from such a transfer.
