Foreign listing: Only large shareholders may be taxed

India could tax only the large foreign shareholders of domestic companies that list directly on overseas exchanges, and such listing may initially be limited to select jurisdictions including the International Financial Services Centre at GIFT City in Gujarat.

Overseas listings are expected to help large Indian startups raise funds at good valuations on foreign exchanges where demand may be higher.

A detailed framework is expected to be announced in the union budget for FY23 that may also list the jurisdictions where the Indian companies could list and provide clarity on the taxability of investments.

The decision to permit overseas direct listing by Indian companies was announced in March 2020, but there has been no follow-up action.


According to people in the know, at least two structures or mechanisms are under consideration to tax foreign investors in Indian companies listing overseas. One, exempt all foreign shareholders holding up to 10% from long-term capital gains tax. Two, tax everyone holding shares prior to listing when they actually exit the investment.

“Multiple deliberations within ministries and at regulatory levels have been held. The idea is to help value creations in India, but at the same time not to have a situation like Vodafone,” a government official said.

In 2007, Vodafone International Holdings bought Indian telecom operator Hutchison Essar in a deal executed overseas, eventually leading to the government controversially amending the income tax law retrospectively to tax the transaction. The government repealed the provision recently and is in the process of settling the cases.

Subsequently, a clear regime has been provided to tax indirect transfer of Indian assets. Any foreign shareholder in an Indian company who holds up to 5% can sell offshore without paying tax here. According to sources, the same framework may be applied to companies listing overseas and the limit can be revised up to 10% in all cases of transfer, listed or unlisted.

According to the official, levying tax on foreign retail investors trading in Indian shares on foreign exchanges is likely to be ruled out. However, Indian investors earning profits on buying and selling equity of Indian firms listed abroad would be liable to capital gains tax under income-tax laws.

“We can't have a situation where foreigners or non-resident Indians pay taxes because they are trading in Indian stock. If that happens, they won't buy shares. The whole concept in that case will be a non-starter,” he said.

On the jurisdiction part, the people said the government is planning to initially allow listing in seven to eight jurisdictions including the IFSCA Gift City in Gujarat, and later add more countries to the list.

Experts said Indian shares must be treated on par with American Depositary Receipts and Global Depositary Receipts.

At present, foreign investors trading in ADRs/GDRs of Indian companies do not have to pay capital gains tax on their profits.

“There are several unicorns waiting to tap global capital markets, especially in technology (SaaS) space, where valuation on overseas exchanges may be more attractive. Most countries do not tax capital gains on listed securities for investors outside their home jurisdiction,” said Bhavin Shah, Leader (deals) at PwC India.

“Even India does not tax income on trading of ADR/GDRs or transactions carried out by non-resident investors on GIFT City Exchanges. Tax neutrality for transactions is key to making overseas listing successful.”

“The depth of global markets will allow Indian companies to tap capital at higher valuations. If this is not permitted, Indian companies desirous of listing abroad will be forced to take the SPAC route for US listing. If, however, overseas listing of Indian companies is allowed, the company's headquarter will remain in India, which will have its advantages for the economy,” Shah added.