Background

We refer to our newsflash dealing with the clarifications issued by the Central Board of Direct Taxes (CBDT) (vide circular no 41 of 2016) on the scope of the indirect transfer provisions, primarily in relation to fund structures (the said Circular).

Post issuance of the said Circular, the CBDT received representations from various foreign portfolio investors (FPIs), foreign institutional investors (FIIs), alternative investment funds (AIFs), venture capital funds (VCFs), offshore funds, fund managers and other stakeholders, expressing concerns regarding the said Circular not having dealt with the issue of possible multiple taxation of the same income (ie direct transfers by funds and indirect transfers by investors at the fund level). These representations are currently being considered and examined. In light of the same, the CBDT has issued a press release on 17 January 2017 (Press Release), keeping the said Circular in abeyance, until a decision on the matter is reached.

Khaitan Comments

The clarifications earlier issued by the CBDT shook the fund sector and were a subject matter of great criticism. The Press Release leaves the stakeholders hopeful of seeing clarity in this regard. It also indicates a conscious effort by the Government in understanding and addressing the concerns expressed by taxpayers. It is expected that the Government, in its upcoming budget (to be presented in February 2017), will provide clarity on this issue.