A

ASSIGNMENT

ON

“TAXATION ASPECTS OF DEPOSITORY RECEIPTS”

_______________________________________________________________________

SUBJECT: BUSINESS TAXATION

Submitted as partial fulfillment of degree of

MBA-MBL 4th Semester

By
MAYANK KUMAR AGRAWAL (200)

To
MR. MANOJ KUMAR
Faculty of law

NATIONAL LAW UNIVERSITY

JODHPUR
ADR/GDR- MEANING AND CONCEPT.

American Depository Receipts and Global Depository Receipts are in form of Depositary
Receipts (DRs) as negotiable securities issued outside India by a Depository Bank, on behalf of
an Indian company, which represent the local Rupee denominated equity shares of the company
held as deposit by a Custodian Bank in India. DRs are traded in Stock Exchanges in the US,
Singapore, Luxembourg etc. DRs listed and traded in the US markets are known as American
Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global
Depository Receipts (GDRs) 1.

AMERICAN DEPOSITORY RECEIPT (ADRS)2.

An American Depository Receipt (ADR) is a negotiable receipt which represents one or more
depository shares held by a US custodian bank, which in turn represent underlying shares of non-
issuer held by a custodian in the home country. ADR is an attractive investment to US investors
willing to invest in securities of non US issuers for following reasons:
 ADRs provide a means to US investors to trade the non-US company’s shares in US
dollars ADR is a negotiable receipt (which represents the non US share) issued in US
capital market and is traded in dollars. The trading in ADR effectively means trading in
underlying shares.
 ADRs facilitate share transfers. ADRs are negotiable and can be easily transferred among
the investors like any other negotiable instrument. The transfer of ADRs automatically
transfers the underlying share.
 The transfer of ADRs does not involve any stamp duty and hence the transfer of
underlying share does not require any stamp duty.
 The dividends are paid to the holders of ADRs in U.S. dollars.

GLOBAL DEPOSITORY RECEIPTS (GDRS).

1
www.raagvamdatt.com/What-is...ADR-and...GDR/126/
2
www.adr.co.in/
Global Depository Receipts are negotiable certificates with publicly traded equity of the issuer as
underlying security. An issue of depository receipts would involve the issuer, issuing agent to a
foreign depository. The depository, in turn, issues GDRs to investors evidencing their rights as
shareholders. Depository receipts are denominated in foreign currency and are listed on an
international exchange such as London or Luxembourg3.

GDRs enable investors to trade a dollar denominated instrument on an international stock

exchange and yet have rights in foreign shares. The principal purpose of the GDR is to provide
international investors with local settlement. The issuer issuing the shares has to pay dividends to
the depository in the domestic currency. The depository has to then convert the domestic
currency into dollars for onward payment to receipt holders. GDRs bear no risk of capital
repayment.

GDRs are also issued with warrants attached to them. Warrants give the investors an option to
get it converted into equity at a later date. Warrants help the issuer to charge some premium on
the GDRs sold and it also helps to increase the demand of the GDR issue. The other advantage to
the issuer is that it will not have to pay dividends on the warrants till the conversion option is
exercised. The disadvantage to the issuer lies in delayed receipt of full proceeds from the issue
and in case the conversion option is not exercised the expected proceeds will not be realised.

TAXATION ON SHARES ISSUED UNDER GLOBAL DEPOSITORY RECEIPT

MECHANISM.

(i) Under the provisions of the Income tax Act, income by way of dividend on share will be
taxed at the rate of 10 per cent. The issuing company shall transfer the dividend
payments net after deducting tax at source to the Overseas Depository Bank4.
(ii) On receipt of these payments of dividend after taxation, the Overseas Depository Bank
shall distribute them to the non- resident investors proportionate to their holdings of
Global Depository Receipts evidencing the relevant shares. The holders of the

3
http://www.gdr.co.in/
4
http://iic.nic.in/iic3_i.htm
 Depository Receipts may take credit of the tax deducted at source on the basis of the
certification by the Overseas Depository Bank, if permitted by the country of their
resident.
(iii) All transactions of trading of the Global Depository Receipts outside India, among non-
resident investors, will be free from any liability of income tax in India on capital gains
there from.
(iv) If any capital gains arise on the transfer of the aforesaid shares in India to the non-
resident investor, he will be liable to income tax under the provisions of the Income tax
Act. If the aforesaid shares are held by the non-resident investor for a period of more
than twelve months from the date of advice of their redemption by the Overseas
Depository Bank, the capital gains arising on the sale thereof will be treated as long-term
capital gains and will be subject to income tax at the rate of 10 per cent under the
provisions of Section 115AC of the Income tax Act. If such shares are held for a period
of less than twelve months from the date of redemption advice, the capital gains arising
on the sale thereof will be treated as short-term capital gains and will be subject to tax at
the normal rates of income tax applicable to non-residents under the provisions of the
Income tax Act.
(v) After redemption of the Depository Receipts into underlying shares, during the period, if
any, during which these shares are held by the redeeming non-resident foreign investor
who has paid for these shares in foreign exchange at the time of purchase of the Global
Depository Receipt, the rate of taxation, of income by way of dividends on these shares
would continue to be at the rate of 10 per cent, in accordance with Section 115AC (1) of
the Income tax Act. The long-term capital gains on the sale of these redeemed
underlying shares held by non-resident investors in the domestic market shall also be
charged to tax at the rate of 10 per cent, in accordance with the provisions of Section
115AC(1).
(vi) When the redeemed shares are sold on the Indian Stock Exchanges against payment in
rupees, these shares shall go out of the purview of Section 115AC of the Income tax Act
and income there from shall not be eligible for the concessional tax treatment provided
there under. After the transfer of shares the consideration is in terms of rupees payment,
the normal tax rates would apply to the income arising or accruing on these shares.
(vii) Deduction of tax at source on the amount of capital gains accruing on transfer of the
shares would be made in accordance with Sections 195 and 196C of the Income tax Act.

TAX ON INCOME FROM BONDS OR SHARES PURCHASED IN FOREIGN

CURRENCY OR CAPITAL GAINS ARISING FROM THEIR TRANSFER [SECTION
115AC]
1. Where the total income of a non-resident includes the following types of income namely:-

(a) income by way of interest on bonds of an Indian company issued in accordance with such
scheme as may be notified by the Government or on bonds of a public sector company, sold by
the Government, and purchased by him in foreign currency; or

(b) Income by way of dividends (other than dividends referred to in section 115-O) on Global
Depository Receipts
(i) issued in accordance with such scheme as the Central Government may specify against the
initial issue of shares of an Indian company and purchased by him in foreign currency through an
approved intermediary; or

(ii) Issued against the shares of a public sector company sold by the Government and purchased
by him in foreign currency through an approved intermediary; or

(iii) Issued or re-issued against the existing shares of an Indian company purchased by him in
foreign currency through an approved intermediary in accordance with a specified scheme; or

(c) Income by way of long-term capital gains arising from the above bonds or shares. The
income-tax will be at the rate of 10% on the above income.

2. Where the gross total income includes interest or dividends in respect of bonds or shares
referred to in this section, no deduction shall be allowed to him under sections 28 to 44C or
under section 57 or under Chapter VIA.
3. Where the gross total income includes interest or dividend (other than dividends referred to in
section 115-O) or income by way of long-term capital gains, such gross total income shall be
reduced by the amount of such income and Chapter VIA deduction will be allowed on such
balance.

4. Nothing contained in the first and second proviso to section 48 shall apply for the computation
of long-term capital gain arising out of the transfer of bonds or shares. Therefore the assessee
will not be allowed any indexation.

5. Where the total income of the non-resident consists only of interest or dividends on bonds and
GDRs and tax has been deducted at source from such income, he need not file a return under
section 139(1).

6. Where the assessee acquired Global Depository Receipts or bonds in an amalgamated or

resulting company by virtue of its holding Global Depository Receipts or bonds in the
amalgamating or demerged company (as the case may be) these provisions shall apply to such
Global Depository Receipts or bonds.

TAX ON INCOME FROM GDRS PURCHASED IN FOREIGN CURRENCY [SECTION

115ACA].
This section applies to resident individuals who are employees of an Indian company engaged in
specified knowledge based industry or service, or its subsidiary engaged in specified knowledge
based industry or service. Sub-section (1) of the section provides that the income-tax payable
shall be the aggregate of
(i) ten per cent of the income by way of dividends (other than dividends referred to in section
115-O) in respect of Global Depository Receipts of an Indian company purchased in foreign
currency in accordance with such employees’ stock option scheme as the Central Government
may, by notification in the Official Gazette, specify in this behalf, if any,

(ii) ten per cent in case of long-term capital gains arising from the transfer of the aforesaid
Global Depository Receipts, if any, and
(iii) The amount of income-tax on the total income as reduced by the aforesaid income from the
said Global Depository Receipts. Sub-section (2) of the section provides that in the case of the
aforesaid resident employee, no deduction shall be allowed under any provisions of this Act
where the gross total income consists only of income from Global Depository Receipts.
However, where the total income includes income from Global Depository Receipts, the
deduction under any provisions of the Act shall be allowed as if the gross total income does not
include the income from the Global Depository Receipts. Sub-section (3) of the section provides
that the first and second provisos of section 48 relating to the computation of capital gains shall
not apply in case of transfer of Global Depository Receipts of an Indian company purchased by
the resident employee in foreign currency. In other words, no indexation will be available even if
the assets are long term capital assets.

APPLICATION OF AVOIDANCE OF DOUBLE TAXATION AGREEMENT IN CASE

OF GLOBAL DEPOSITORY RECEIPTS
I. During the period of fiduciary ownership of shares in the hands of the
Overseas Depository Bank, the provisions of Avoidance of Double Taxation
Agreement entered into by the Government of India with the country of
residence of the Overseas Depository Bank will be applicable in the matter of
taxation of income from dividends from underlying shares and interest on
Foreign Currency Convertible Bonds.
II. During the period, if any, when the redeemed underlying shares are held by
the non-resident investor on transfer from fiduciary ownership of the Overseas
Depository Bank, before they are sold to resident purchasers, the Avoidance
of Double Taxation Agreement entered into by the Government of India with
the country of residence of the non-resident investor will be applicable in the
matter of taxation of income from the dividends from the said underlying
shares, or interest on Foreign Currency Convertible Bonds, or any capital gain
arising out of transfer of underlying shares.