Which one of the following situations best reflects "Indirect Transfers" often talked about in media recently with reference to India ?

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UPSC Civil Services Exam Official 2022 Prelims General Studies held on 5th June
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  1. An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
  2. A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
  3. An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
  4. A foreign company transfers shares and such shares derive their substantial value from assets located in India

Answer (Detailed Solution Below)

Option 4 : A foreign company transfers shares and such shares derive their substantial value from assets located in India
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Detailed Solution

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The correct answer is Option 4.

Key PointsIndirect transfer

  • Its provisions deal with the taxation of transactions wherein even though the transfer of shares took place overseas, the underlying assets were in India.
  • It refers to situations where when foreign entities own shares or assets in India, the shares of such foreign entities are transferred instead of a direct transfer of the underlying assets in India. Hence, Option 4 is correct.
  • Indirect transfer provisions were introduced in the I-T act in 2012 with retrospective effect, as the government sought to bring Vodafone Group Plc.’s $11 billion acquisition of Hutchison Essar Ltd in 2007 (by acquiring a Cayman subsidiary owned by Hutchison International) and the other such transactions under the tax net in India.
  • Only those indirect transfer transactions wherein more than 50% of the underlying assets are in India will be subject to a levy of capital gains tax in India. But the clarifications also extended the tax to funds, including those outside India.
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