Many family offices of Indian promoters and businessmen that invest in the Indian stock markets or hold equity in Indian companies through holding companies registered outside India are now looking to restructure these, people in the know said.
This comes a days after the government gave a leeway to most foreign portfolio investors (FPIs) from the indirect transfer of shares regulations.
Indirect transfer of share regulations – brought in after Vodafone won a transfer-pricing tax dispute with the government – provides for taxing overseas transactions of shares of Indian companies, provided the shares constitute more than 50 per cent of the foreign fund’s total assets (exceeding Rs 10 crore).
Hundreds of FPIs and some private equity funds still face the risk of being taxed in India for indirect transfer of shares of Indian companies because the leeway announced in the budget is available to only certain categories of investors.
While the regulations around indirect transfer of shares meant that some FPIs investing in India outside India could attract taxes in India. The original regulations had come in 2012 however a clarification by the central board of direct taxes in December last year had raised a lot of concerns amongst the FPIs who feared that they could attract anywhere between 20% to 40% tax on their returns from India.
Many private equity and venture capital funds are still worried as most of them fall under category 3 which is not exempted from the indirect transfer of shares regulations.
The regulations means that a domestic private equity fund that has deployed 50% or more of its money in India can face this tax if it sells its portfolio to any buyer who is not located in the country. The tax rate could be 10-20% on long term capital gains and higher tax of 30-40% on short term capital gains as per the current law.
All the family offices too fall under the category 3. Industry trackers say that many promoters of some of the largest Indian companies hold equity through a complicated structure through family offices registered outside India.
“Many of these family offices are now looking to change these structures as otherwise they would attract taxes,” said a taxation lawyer who is working with at least two such clients. In many cases the layered structures where equity in the Indian company is held by an investment companies registered outside India, were mainly created as a tool for tax planning, say experts.
Source – Economic Times