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UPSC Prelims 2022

Indirect Transfers - UPSC Prelims 2022 Question

Prelims General Studies Paper - 1

May 14, 2023

3 min read

Question

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.

Answer

The correct answer is D. A foreign company transfers shares and such shares derive their substantial value from assets located in India.

Indirect transfers occur when shares or assets of foreign entities that have holdings in India are transferred instead of directly transferring the underlying assets located in India.

In the context of indirect transfers, when shares of a foreign company or interests in an entity incorporated or registered outside India are transferred, and if the substantial value of such shares or interests is derived from assets located in India, whether directly or indirectly, it is referred to as an "Indirect Transfer." In such cases, the income generated from the transfer is deemed to accrue or arise in India. Consequently, this income becomes subject to taxation for all individuals, including both resident and non-resident individuals.

The principle behind taxing indirect transfers is to ensure that any gains or income arising from the transfer of assets in India, even if done indirectly through the transfer of shares or interests in foreign entities, are not exempt from taxation. This ensures that the tax jurisdiction extends to the economic value derived from Indian assets, regardless of the method of transfer.

Therefore, both residents and non-residents are liable to pay taxes on the income generated from indirect transfers, as per the provisions of the Indian tax laws. This measure aims to prevent potential tax evasion or avoidance by ensuring that the income derived from Indian assets is appropriately taxed, irrespective of the legal structure used for the transfer.

By imposing taxation on indirect transfers, the Indian government seeks to maintain tax transparency and fairness, ensuring that income generated from Indian assets contributes to the overall tax revenue. It also serves as a means to protect the Indian tax base and prevent potential misuse or exploitation of cross-border transactions involving Indian assets.