India-oriented funds overseas could possibly face triple-taxation because of previous circulars and India’s own taxation laws.
Previous circulars contained information that India-oriented funds would be taxable if shares were sold overseas (currently abated), and the principal amendment in the Income Tax Act on indirect transfers would result in retrospective taxation.
The decision to review the policies comes in light of many Foreign Portfolio Investors (FPIs), venture capital funds, etc. expressing concern that the income generated as a result of their activities would be liable to double, or even triple taxation.
Overseas fund investors would get taxed in India on their income, and this would not translate into any tax credit in their home countries. The DTAA or Double Taxation Avoidance Agreement also won’t be able to protect such investors and venture capital companies.
The circular which was retracted by the IT department would have put 181 publicly traded funds at risk, which have an exposure to India of over half the total assets under management. That’s almost $39 billion under management.