Plan For Direct Overseas Listing of Indian Shares On Backburner

The government’s proposal to allow direct listing of Indian shares overseas may be a non-starter with the Department of Revenue refusing to grant any exemption on capital gains tax, two people familiar with the matter said.

The tax department is unwilling to provide an exemption from the levy arising from the transfer of shares of Indian companies by non-residents, the people said on the condition of anonymity.

A query emailed to the Ministry of Finance on Tuesday seeking a comment remained unanswered.

The income tax law treats overseas listed shares as a capital asset situated in India. Currently, transfer of shares by non-residents attracts a short-term capital gains rate of 30% or 40% depending on whether it is an individual or an entity, and a long-term capital gains rate of 20% plus surcharge. That may make shares of Indian companies listed overseas unattractive for foreign investors compared to shares of other overseas companies listed on the same exchange.

In March 2020, the Union Cabinet had approved direct overseas listing of shares of Indian companies to help them raise capital around the world. The tax treatment involved will be covered in the enabling provision in a manner similar to the listing of global and American depository receipts, Ingeti Srinivas, former corporate affairs secretary, had told reporters in Delhi.

Investors holding ADRs and GDRs don’t pay capital gains tax if they do not convert them into equity shares.

A similar exemption, however, cannot be given for the proposal to list domestic stocks on foreign exchanges since depository receipts are foreign instruments traded on overseas exchanges, and not Indian shares, according to the second person cited earlier.

And even if Indian companies are able list overseas successfully, the revenue department will find it virtually impossible to collect any tax.

There is no mechanism for recovering tax from non-resident investors from trading in overseas stock exchanges, said Suresh Swamy, partner at Price Waterhouse & Co LLP. Taxation ideally should be similar to ADR/GDRs listed overseas, he said. But given its stand on indirect overseas transfer, Swamy said, India will find it difficult grant an exemption on direct overseas transfer.

Legally, either there is an exemption or not, the second person quoted earlier said. The plan is shelved for now and it will probably become clear in the next budget if there is a way around it procedurally, the person said.

Punit Shah, partner at Dhruva Advisors, agreed.

“If you are holding shares which are listed overseas and you have to sell those being an Indian resident, global income is taxable in India,” Shah told BloombergQuint. “If a non-resident is holding shares of Indian companies that are listed overseas, even that is taxable at the rate of 20%. There is no way you can avoid those taxes.”

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