Direct listing overseas: Foreign retail investors may be exempt from tax in India

Only large foreign investors in companies that list in overseas exchanges will come under the tax net in India, according to a report in The Economic Times.

Direct listing abroad is likely to help large startups raise funds at good valuations on foreign exchanges. The government in March last year had allowed overseas direct listing There has, however, not been much follow-up action since then.

The report in The Economic Times further said that such listing to begin with may be limited to select jurisdictions, including the International Financial Services Centre at GIFT City in Gujarat.

The next Budget may unveil a detailed framework on tax implication on foreign investments in direct listing overseas by Indian companies, according to the news report which also said the Budget  may also release the list of  jurisdictions where the Indian companies can list.

Government to avoid Vodafone like situation

Quoting unnamed people, the report said at least two mechanisms are under consideration to tax foreign investors in Indian companies listing overseas. One structure proposed exempting all foreign shareholders with up to 10% holding from long-term capital gains tax. The second mechanism proposes taxing everyone holding shares prior to listing when they exit.

Discussions at multiple levels are being held and the government doesn’t want a Vodafone-like situation, the official is quoted as saying.

While foreign retail investors are unlikely to be taxed, domestic investors in Indian firms listed abroad would come under capital gains tax under, the report said.

The official is quoted as saying that taxing foreign investors trading in Indian stocks listed abroad defeats the very concept of direct listing by Indian companies on bourses overseas.

Foreign investors trading in American depository receipts (ADRs) or Global depository receipts (GDRs) of Indian companies need not pay capital gains tax, the report said.

The Economic Times has quoted Bhavin Shah, Leader (deals) at PwC India, as saying that countries normally do not tax investors on capital gains on listed securities outside their home jurisdiction.