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2012 India Budget

What you need to know?

The 2012 India Budget has been approved by the President of India on May 28, 2012 and has been enacted into legislation effective April 1, 2012 unless otherwise specified. We have highlighted the important changes below impacting asset managers investing in India.

Taxation of Indirect transfers — retrospective amendment

Gains from transfer of shares or interest in a foreign entity will be taxable in India if the shares/interest derive value substantially from assets located in India (directly or indirectly). The amendment could impact indirect transfers executed in the last seven years considering the statute of limitations. In view of withholding tax provisions, the amendment might affect sellers as well as buyers.

Introduction of General Anti Avoidance Rules ("GAAR")

GAAR has been introduced effective April 1, 2013 primarily to codify the doctrine of substance over form and to deal with aggressive tax planning. GAAR provisions override tax treaties to prevent treaty abuse and bring certain cross border transactions under taxation. Under GAAR, an arrangement can be declared impermissible if it inter alia lacks commercial substance.

Beneficial amendments to capital gains

The Indian Supreme Court holds that the sale of shares outside of India by Hutch to Vodafone is not liable to tax in India and accordingly Vodafone is not subject to Indian withholding tax obligations. In holding that the indirect transfer of capital assets located in India is not subject to tax in India, the Supreme Court provided guidance on adopting an approach that looks at the entirety of the transaction.

  • Long-term capital gains [for most assets, the holding period is more than twelve months] earned by non-residents on the sale of unlisted securities will be taxed at the lower rate of 10 percent (plus surcharges) instead of the existing rate of 20 percent.
  • Sales of unlisted equity shares in an initial public offering under an offer for sale to the public, will be exempt from capital gains tax effective July 1, 2012 if such shares are held for more than twelve months, and taxed at a concessional rate of 15 percent (plus surcharges) in other cases. Such sales will be liable for a securities transaction tax at 0.20 percent of the sale price, regardless of whether there is a gain.
Condition to avail tax treaty benefits

Tax residency certificates, completed in a prescribed format, will be mandatory for taxpayers seeking to claim treaty benefits, effective as of April 1, 2012.

Take action now

Fund complexes should assess the impact of these developments on their investment activities in India including:

  • An analysis of the structures and treaty provisions in place
  • An analysis of capital gains tax exposure for an open tax year, including any impact on net asset values/capital accounts
  • An analysis of potential capital gains tax due on portfolio positions

For additional information or questions, please contact:

Ted Dougherty
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165

Tom Butera
Principal
Deloitte Tax LLP
+1 212 436 3231

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