Definition of indirect transfers in taxation
Question
Which one of the following situations best reflects "Indirect Transfers" often talked about in media recently with reference to India?
Options
An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
A foreign company transfers shares and such shares derive their substantial value from assets located in India
Explanation
The concept of "Indirect Transfers" (famously central to the Vodafone taxation case) occurs when a foreign entity transfers shares of a foreign company, but those shares derive their core, substantial value from underlying assets physically located within India. This structure previously allowed corporations to evade taxes, prompting India to amend its laws to tax the capital gains from such offshore transactions.
Answer: (d).
Question details
Year
2022
Paper
GS Paper 1
Question
Q8
Subject
Economy
Sub-topic
Fiscal Policy, Taxation & Budget
Type
Factual single
Difficulty
Medium
Nature
Current-affairs-linked
Source hint
Income Tax Act 1961 / Vodafone Indirect Transfer Retro Tax Repeal 2021
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