India: Exclusion of overseas dividend from indirect transfer provisions

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India: Exclusion of overseas dividend from indirect transfer provisions

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Rajendra Nayak


Aastha Jain

Under the Indian Tax Law (ITL), income arising from any asset in India or from transfer of a capital asset situated in India would be taxable in India. In 2012, the ITL was retroactively amended to introduce provisions for the taxation of indirect transfer (IDT provisions) under which it was clarified that an asset or a capital asset being any share in a foreign company shall be deemed to be situated in India, if such shares derive their value substantially from the assets located in India. Accordingly, transfer of such deemed asset was taxable in India. The legislative intent of such provision was to tax gains having an economic nexus with India, irrespective of the mode of realisation of such gains. Apprehensions were raised by various stakeholders on the overreaching scope of deeming fiction under the IDT provisions, which deems the shares of a foreign company to be situated in India. Concern was raised that the provisions would result in taxation in India of dividend income declared by such foreign company outside India. This was perceived as an unintended consequence of the IDT provisions.

The Central Board of Direct Taxes (CBDT), the apex administrative body for taxation in India, recently issued a circular (Circular 4 of 2015) to clarify that:

  • the IDT provisions would trigger tax for the transaction which has the effect of transferring, directly or indirectly, the underlying assets located in India, as income accruing or arising in India; and

  • declaration of dividend by a foreign company outside India does not have an effect of transfer of any underlying asset located in India. Accordingly, such dividend paid by foreign company would not be taxable in India by virtue of the IDT provisions of the ITL.

This clarification from the CBDT addresses the concern which had arisen on account of the wide scope of the IDT provisions. This is also in line with the intent of the present Indian Government to provide certainty and stability in India's tax regime.

Rajendra Nayak (rajendra.nayak@in.ey.com) and Aastha Jain (aastha.jain@in.ey.com)

Ernst & Young

Tel: +91 80 6727 5275

Website: www.ey.com/india

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