UPSC Prelims 2022 · Question 8 of 98

UPSC Prelims 2022 question on Indirect Transfers Tax

Which one of the following situations best reflects 'Indirect Transfers' often talked about in media recently with reference to India?

  1. An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
  2. A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
  3. An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
  4. A foreign company transfers shares and such shares derive their substantial value from assets located in India
Show answer

Answer: D. A foreign company transfers shares and such shares derive their substantial value from assets located in India

Verdict

Correct answer: Option (d).

Analysis

Indirect transfers refer to situations where foreign entities own shares or assets in India, but the shares of such foreign entities are transferred instead of a direct transfer of the underlying assets in India.

Statement by statement

Option (a) – INCORRECT: This describes direct outbound investment by an Indian company, not indirect transfer.

Option (b) – INCORRECT: This describes a normal foreign investment scenario, not indirect transfer.

Option (c) – INCORRECT: This describes a direct asset sale abroad by an Indian company.

Option (d) – CORRECT: When a foreign company transfers shares that derive their substantial value from assets located in India, this is an indirect transfer. The 2012 Finance Act introduced retrospective taxation on such indirect transfers (the Vodafone case). The Taxation Laws (Amendment) Act, 2021 nullified this retrospective taxation.

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