Suggestions on Clause 4 of Finance Bill 2017 – Section 9(1)(i)- Benefit of non-applicability of indirect transfer provisions in case of Category I and II FPIs – Benefit to be extended to Category III FPIs and provisions for avoidance of double taxation in case of such indirect transfer provisions, where direct transfer has already been subject to tax

The Finance Act, 2012 amended Section 9(1)(i) of the Act with retrospective effect from 1st April 1962 to provide that any share or interest in an entity incorporated outside India shall be deemed to be situated in India if such share or interest derives, directly or indirectly, its value substantially from assets located in India.

The Finance Bill, 2017 proposes that the aforesaid deeming provisions shall not apply to an asset or capital asset mentioned in Explanation 5 of section 9(1)(i), which is held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD and registered as Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992.

The Finance Bill, 2017 proposes to exempt investors (direct / indirect) in category I (sovereign funds) and category II (broad-based funds) FPIs from the application of indirect transfer tax provisions.


It is suggested that:

a. This exemption may be extended to Category III (other than broad-based) FPIs as well as private equity funds too.

b. Further, while it is a welcome amendment for FPIs registered as Category -I or Category -II, in many other situations the indirect transfer provisions may lead to double taxation – first when the investments in India are sold by the offshore company or entity (by way of direct transfer) and second when such offshore company or entity passes on the consideration arising from such disposal to its investors either by way of redemption, buy-back, re-purchase, etc.

Therefore, a suitable amendment should be brought in to the effect that once a transfer is taxable in India, the same shall not be taxed again pursuant to applicability of indirect transfer provisions.

Source- ICAI Post-Budget Memoranda-2017
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