An Event of Indirect Transfer Tax

Did you know that transfers of shares in a foreign company can be taxable in India if they derive substantial value from Indian assets? Here’s how:

Tax Event: 
Shares of a foreign company are deemed to derive its value substantially from India, if on the specified date, the value of shares of Indian company:
– exceeds INR 10 crore (approx. USD 1.2mn); and
– represent at least 50% of the foreign company’s asset value

Key Exemptions
– Small Shareholders: Shareholders holding 5% or less, directly or indirectly
– Category I FPIs

Background
The landmark Vodafone case brought this issue to the forefront. This case involved Vodafone’s acquisition of Hutchison’s stake in a Cayman Islands company, indirectly owning substantial assets in India. The Indian tax authorities claimed tax on the transaction, arguing that the transfer derived significant value from Indian assets. Vodafone contended that the transaction was not taxable under existing laws. The Supreme Court of India ruled in Vodafone’s favor in 2012. However, in response, the Indian government introduced a retrospective amendment to the Income Tax Act, 1961 allowing taxation of such indirect transfers, thereby overturning the Supreme Court’s decision and leading to prolonged legal disputes.

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