Thanks to the Vodafone tax saga, everybody now understands the term 'indirect transfer'. Transferring a holding company or a chain of holding companies instead of transferring 'an underlying asset' is indirect transfer.

Such transfers are often required for business reasons and may not be solely for tax avoidance. Selling a holding company instead of the underlying property is common practice in many markets; but several jurisdictions have legislation to ensure that stamp duties are not avoided in the process. Similarly, many jurisdictions rightly seek to ensure that capital gains taxes are not avoided through offshore indirect transfers.

Indian Parliament has enacted retrospective amendments clarifying that the original legislative intent (since 1961) was to subject offshore indirect transfers to taxation in India and to compel acquirers to deduct and discharge tax obligations of non-resident sellers. The amendments are targeted at nullifying the Supreme Court (SC) verdict on taxation of Vodafone's acquisition of Hutchison Cellular, India's second-largest mobile telecom operator.

The SC has ruled that Vodafone was correct in accepting Hutch's negotiating position that no 'taxable event' will occur under Indian tax laws as no transaction was contemplated in Indian securities. The amendments are seeking to make the Vodafone-Hutch transaction a taxable event and oblige Vodafone to discharge Hutch's tax liabilities.

Whether the proposed amendments are substantive or clarificatory, whether it is reasonable to compel Vodafone to pay Hutch's tax obligations and whether the 15th Lok Sabha can clarify legislative intent of the second Lok Sabha are issues that the SC will have to rule on. But the proposed amendments have several second order issues that can be clarified by the Central Board of Direct Taxes (CBDT).

Indirect transfers don't happen only in tax havens; tax provisions have to accommodate indirect transfers that may occur in high-tax countries. For example, the amendments can be interpreted to imply that a buyer of one Vedanta share on the London Stock Exchange has to ascertain and discharge Indian tax obligations of the seller (who may also have UK tax obligations), which is a ridiculous proposition, to say the least.

Clearly, transfers in overseas listed companies need to be specifically excluded, as suggested in the draft of the new Direct Taxes Code (DTC). Also, credits for taxes paid or payable in the offshore jurisdiction will have to be provided before collecting taxes on indirect transfers.

Also, the amendments can be interpreted to mean that the entire consideration is subject to Indian tax and not the share of the value derivedfrom underlying Indian assets, again a sensible premise clearly articulated in the DTC. The DTC only targeted aspecific subset of indirect transfers where at least 50% of the consideration was attributable to India.

Also, two key clarifications are required: firstly, a provision to exclude non-cash inter-group transfers (often required to reorganise group structures) is needed. Secondly, only indirect transfers of interests in one Indian company or a group of Indian companies under the same management must be targeted for taxation in order to exclude transfer of interests in offshore funds (clearly not intended).