The income tax department on Monday put out draft rules to assess the value of the assets of a multinational company in India and abroad in an attempt to provide clarity for levy of capital gains tax on indirect transfer of shares.

While these rules will provide clarity on how the tax department proposes to tax these transactions in India and prevent disputes like Vodafone Group Plc from recurring in the future, they also propose to make the reporting requirements for the Indian arm of the global entities more tedious.

The budget last year had clarified that capital gains arising out of overseas indirect transfer of shares will be taxable in India if more than 50% of the underlying assets are in India. It had also said that the value of the Indian asset with respect to the overall assets of the multinational company will be calculated on a fair market value basis. It has now put on the draft rules for stakeholder feedback.

Levy of capital gains tax on indirect transfer of shares has been a litigious issue with the tax department involved in a legal battle with companies such as Vodafone and Cairn Energy Plc over retrospective taxation of capital gains.

It is expected that these rules will help avoid any tax disputes related to such transactions in the future.

In the draft rules, the tax department has now sought to clearly spell out the way the fair market value will be computed. However, it proposes to drastically increase the reporting requirements for the Indian entity. If the Indian entity fails to furnish the information sought, then the entire value of the transaction will be taxable in India, according to the rules.

The Indian company will have to furnish details of the immediate holding company or entity, intermediate holding company or companies or entity or entities and ultimate holding company along with details of the holding structure.

The company also has to disclose financial and accounting statements of the foreign company or the entity which directly or indirectly holds the assets in India. Other reporting requirements include the valuation report of the assets along with details of the transaction.#casansaar (LIveMint)