India: Early Christmas Gift!! Some Relief To Investors In Offshore Feeder Vehicles From Indirect Transfer Tax

In response to industry representations, the Central Board of Direct Taxes (CBDT) has issued a circular on 7 November 2017 (Circular) granting some relief from the applicability of Indian capital gains tax on indirect transfers of Indian assets (Indirect Transfer Rules) as contained in the Income Tax Act, 1961 (IT Act) to certain offshore holding structures. As per the Circular, Indirect Transfer Rules would not apply to investments made by non-resident (NR) investors in feeder vehicles being set-up to pool capital overseas for investments into India, i.e. multiple tier pooling structures used for investing into India will not be subject to Indirect Transfer Rules in case the feeder vehicles redeem or buy-back shares / other instruments for the purpose of distribution of gains to their investors from sale of Indian investments.


Indirect Transfer Rules, introduced in 2012, provide that transfer of shares or interest in a foreign entity, by a NR, which in turn derives its value substantially from Indian assets, would be subject to capital gains tax in India. These provisions resulted in economic double taxation of proceeds received from sale of Indian assets as follows: Firstly, at the time of sale of the Indian asset by the transferor; and secondly, (or many times over in case of multilayer investment vehicles) at the time of distribution of such sale proceeds to the NR investor either through buy-back or redemption or such other mode which also results in transfer of shares in the offshore entity, thereby triggering Indirect Transfer Rules. The offshore pooling vehicle in most of these cases, being set up for investment in India would continue to derive substantial value from Indian assets till such time that the last of its Indian asset is sold off. Typically, the redemption or buy-back would be made by the offshore pooling vehicle post its exit from only some and not all of its Indian investments.

Pursuant to representations made by the stakeholders, the Government recognised the need to provide relief from such economic double taxation. The Finance Act, 2017 did provide some relief by amending the IT Act whereby investors of Category-I and Category-II Foreign Portfolio Investors (FPI) were exempted from application of the Indirect Transfer Rules. Accordingly, investors of Category-I and Category-II FPIs would not be subject to Indian capital gains tax at the time of their exit from the FPI.

However, the economic double taxation in the case of other multiple tier investment structures (other than FPIs) remained unaddressed. The current Circular is intended to address this issue.


The clarification is explained below with the help of following structure:

The Circular provides relief for investors in pooling vehicle set up outside India, which has in turn invested in certain specified Indian funds, i.e. Investment Funds (registered as Category I or Category II Alternate Investment Funds), VCF, VCC, (together referred to as, Specified Funds). These Specified Funds are not subject to tax in respect of the capital gains from transfer of investments owing to the pass-through status granted to them under the IT Act. Hence, any direct transfer of the investments by the Specified Funds, is taxable only at the level of its investors, as if such investors had directly earned income from transfer of investments. The Circular clarifies that if the capital gains on transfer of shares or securities held by a 'Specified Fund' are chargeable to tax in India in the hands of the NR entity which directly holds the Specified Funds, then income arising to NR investors of such NR entity (as it would be in case of the NR being a feeder fund or pooling vehicle) on account of redemption or buyback of the share or interest in such NR entity would not attract the Indirect Transfer Rules.

Thus, in the above structure, redemption of share or interest held by the Investors in the Feeder Fund or buy back of shares by the Feeder Fund would not attract Indirect Transfer Rules, if the Feeder Fund is chargeable to tax in India on the income from transfer of shares held by the Specified Funds.

The Circular further provides that exemption from the Indirect Transfer Rules would be available only in the cases where the redemption proceeds or the buy-back amount arising to the NR (Investors in the above illustration) does not exceed its pro-rata share in the total consideration realized by the Specified Funds from the transfer of shares or securities in India.


It is common to have multitier structures set-up overseas for the purpose of pooling capital of offshore investors from various jurisdictions for the purpose of facilitating investments in Specified Funds. These structures, generally referred to as a 'Unified Structure' have found popularity owing to the reduced burden of Indian compliances (such as need to obtain a tax registration number in India and make annual tax filings with Indian authorities) for the investors. Applicable tax, as rightly observed in the Circular is paid at the Feeder Fund level where all the investors are pooled, owing to the pass-through status granted to the Specified Funds under the IT Act.

While the Circular provides much-needed respite to investors using pooling vehicles (which are not FPIs) for making investments into Investment Funds, VCF, VCCs, there are certain gaps and unfortunately it does not achieve the full objective it set out to achieve.

The Circular requires the direct investor (Feeder Fund in the above illustration) to be 'chargeable to tax in India' on the income from transfer of the shares and securities by the Specified Funds. Given that the idea is to avoid double taxation of the same income, once at the level of the Feeder Fund and again in the hands of the NR Investors upon redemption or buy back of shares held in the Feeder Fund, one can infer that the Feeder Fund should have paid tax on the income from transfer of the Indian investments for its investors to be able to claim relief under the Circular. Thus, where the Feeder Fund is not taxed in India owing to relief available under a tax treaty or exemption under the IT Act (eg due to exemption available on on-market sale of long term listed shares), the relief under the Circular would not be available to its investors. For example, in the above illustration where the Feeder Fund is established in a country whose tax treaty with India exempts Indian capital gains tax (eg Mauritius, Singapore, Cyprus, when investment was made before 1 April 2017, and the Netherlands in certain cases), relief under the Circular would not be available to its Investors.

Further, it is vital to note that the Circular requires the redemption amount or buy back amount not to exceed the pro-rata share of the NR in the consideration received on sale of shares / securities by the Specified Funds. Therefore, relief under the Circular may not be available where the redemption or buy back by the Feeder Fund contemplates a differential pricing resulting in disproportionate gains in the hands of the Investors.  Given that the industry practice or fund document permits this, one would need to carefully examine distributions (including distributions in the nature of carry), if any, being made at the level of the offshore Feeder Fund.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions