Foreign Investors Trading Indian Cos’ Shares Abroad Won't Be Liable To Capital Gains Tax

January 29^th, 2014, After allowing unlisted Indian companies to list overseas, the finance ministry has decided to sweeten the deal for such listings. Foreign investors buying or selling shares of Indian companies listed overseas will not be liable to capital gains tax. The finance ministry has decided to treat the shares issued by unlisted Indian companies on overseas bourses on par with American depository receipt (ADR) and global depository receipt (GDR) schemes. "Shares issuance on the overseas exchanges would be treated on par with ADR and GDR scheme," a senior finance ministry official told ET. The Central Board of Direct Taxes, the apex direct taxes body, will soon issue a notification in this regard. Unlisted companies were allowed to list overseas in 1990, but the government banned such listings in 2005. 

The Central Board of Direct Taxes, the apex direct taxes body, will soon issue a notification in this regard. Unlisted companies were allowed to list overseas in 1990, but the government banned such listings in 2005. This was essentially aimed at preventing export of Indian market overseas and shift in regulatory jurisdiction for such companies to foreign regulators. High current account deficit and the need for long-term stable capital flows prompted a rethink last year. In September, the government again allowed unlisted companies to list on foreign bourses. It also brought in a balance in policy as unlisted companies are already allowed to raise foreign debt. The scheme, launched by the department of economic affairs, will run for two years on a pilot basis. However, lack of clarity on taxation has held back Indian companies from pursuing overseas listing. At present, foreign investors trading in ADR/GDRs of Indian companies do not have to pay capital gains tax on their profits. The same tax regime would be extended to this scheme. Experts say a clarification in this regard is welcome. "This would help the scheme take off. A clarification would give certainty to tax outcomes," said Rahul Garg, leader, direct tax practice, PWC. Foreign investors trading Indian co.s' shares won't be liable to capital gains tax. The clarification would be issued under Section 115AC of the Income-tax Act. Companies in sectors that are better understood and appreciated overseas can benefit by the scheme, for instance those in the storied information technology sector. As per the scheme, companies can use capital raised to retire outstanding overseas debt for operations abroad including for acquisitions, but will have to remit the funds raised to India within 15 days if they are not utilised. The listing company will also have to comply with the foreign direct investment policy and sectoral caps. Listing has been allowed only on exchanges in IOSCO or Financial Action Task Force-compliant jurisdictions or those jurisdictions with which market regulator SEBI has signed bilateral agreements.