Which one of the following situations best reflects "Indirect Transfers" often talked about in media recently with reference to India ?
- (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
- (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
- (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
- (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India ✓ UPSC's answer
Why the answer is (d)
• 'Indirect transfer' refers to the sale of shares of a foreign company whose value derives substantially from assets located in India — for example, Vodafone's 2007 purchase of a Cayman Islands company that held Hutchison's Indian telecom business — option (d).
• After the Supreme Court ruled in Vodafone's favour in 2012, the Finance Act 2012 retrospectively taxed such transfers, triggering arbitration cases by Vodafone and Cairn that India lost; the retrospective provision was withdrawn in 2021.
• Options (a), (b) and (c) describe ordinary outbound or inbound investment and asset sales, which are taxed under normal rules.
• Hence option (d).
Why the other options are wrong
- (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign…
- Outbound investment taxed abroad is not an indirect transfer.
- (b) A foreign company investing in India and paying taxes to the country of its base on the…
- Inbound FDI taxed at home is ordinary cross-border investment.
- (c) An Indian company purchases tangible assets in a foreign country and sells such assets…
- Direct sale of foreign tangible assets is not the Vodafone-type indirect transfer.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2022, held on 5 June 2022. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.