Indirect transfer UPSC pre 2022

 This question was an easy question and deals with the Indirect transfer concept.

 

it was easy because it was in regular news due to a decision by the Netherlands arbitration court in 2020-2021.

 

The court has ordered the Indian government to pay $1.2 billion [more than 8 thousand crores] to Cairn energy for tax harassment.

 

Due to this in 2021, the government came up with Taxation laws [Amendment], bill 2021.

 

What are Taxation laws [Amendment], bill 2021?

 

It was an amendment in taxation laws which was focused on ending the retrospective tax issue.

 

In short it says that

 

"if Indirect transfer of Indian asset occurred before May 28, 2012, then the Indian government will not demand taxes on it."

 

If Income tax authorities had collected any taxes from such companies then the Indian government will refund the money to the victim company [with 0% interest].

 

However, the company need to drop all the cases against the Indian tax authorities.

 

So, Cairn energy agreed to drop all the cases.

 

A similar thing is happening with Vodafone they are also thinking to drop all cases.

 

What is Indirect transfer?

 

To avoid paying capital gain tax in India, foreign companies usually create shell companies to indirectly transfer Indian Assets.

 

E.g. when Vodafone bought Hutch in 2007 they did the same Indirect transfer.

 

Let's understand the Indirect transfer with an example,

Let us assume

 

company A = Foreign Company

Company B = Indian Company

 

A wants to buy B

 

So, A will not directly buy B both the company will form shell companies in tax heaven and B will indirectly transfer its share and A will buy that Shell company by paying taxes to the government which are very less.

 

What is Capital gain tax?

 

When an owner makes a profit by selling his capital asset such as non-agro-land, property, Vehicle etc.

 

Then he has to pay capital gain tax on it.

 

Imp. News

In budget 2022 - The government asked for 30% CGT on profit made by selling Bitcoin or virtual digital assets.

 

What is retrospective tax?

 

It is an act of demanding tax on a transaction that occurred in the past When such a transaction was not taxable.

 

Why retrospective tax needed?

 

It was used to deal with the problem of tax avoidance by foreign companies who engaged in the Indirect transfer of Indian assets through the sale/purchase of shell companies in tax havens.

 

Why government removed the retrospective tax provision?

 

To increase the trust between the government and the industry which can increase the Investment of these companies in the Indian economy and resolve issues of unemployment, Poverty, low economic growth etc.

 

 

Now to Revise the concept let's see the question,

 

 

Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ?-- UPSC pre 2022

 

(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

 

 

Solution -“D”.