Foreign portfolio investors (FPIs) have received a slew of notices on foreign remittances made outside India under Section 133 (6) of the Income Tax Act, said two people in the know.
While FPIs have received such notices in the past, the number has gone up significantly this year. In a first, tax authorities have asked for KYC details, names of ultimate beneficial owners, their holdings, country of residence and citizenship, along with the nature of remittances.
Tracking money flow
The intent seems to be to track the money flow and assess whether the origination and repatriation of the monies are in the same country.
“How are the funds structured, who are the ultimate beneficial owners, who controls the funds and who are the senior managing officials? These are some of the questions that are being raised,” said a person who deal with FPIs.
For a fund investing from Singapore into India, capital gains will be taxable. But the dividend or interest income will be subject to tax at the concessional rate of 10 per cent. To be eligible for the concessional rate, the fund needs to demonstrate that it is the beneficial owner of the income and a tax resident of Singapore.
The Singapore fund, however, may be repatriating the gains made from investing in India to a country like Mauritius or the US. This is being looked upon with suspicion.
“Funds coming from treaty jurisdictions and taking treaty benefits could be repatriating the money into non-treaty jurisdictions where the tax laws are not so friendly. The tax office may want to curb such practices and disallow treaty benefits to these funds,” said the person quoted above.
FPIs that invest in India realise their capital gains and repatriate the money back to the home country, along with dividend and interest income. A relevant tax certificate is provided to the local custodian by a chartered accountant that could include details of treaty benefits availed by the fund. Based on the tax status of the investor, the custodians then allow FPIs to move the money out of India.
“If the money has gone to a country other than where the fund is based, it could imply that the fund has been treaty shopping. If even the bank account is being operated from another country, the “substance” of the fund could be called into question and lead to denial of treaty benefits. Taxes where exemption was claimed could become payable, along with interest and penalities,” said another person.
Substance test
A substance test typically requires a fund to prove its presence in a particular jurisdiction, by way of its registered office, staff, cash flows, etc.
“When assessing an entity’s eligibility for a treaty claim, the country to which remittances are sent is just one of several factors considered. It’s important to note that this factor alone should not automatically result in a denial of the treaty claim if the entity can demonstrate valid commercial reasons for sending remittances to a different country,” said Suresh Swamy, Partner, Price Waterhouse & Co.
The notices could culminate in prolonged litigation for the FPIs. Based on the responses of the tax payer to the notices, the tax authorities will prepare a report and pass on the same to the assessing officers.
“The current crop of notices has led to a lot of concern among FPIs, which say they work with lean structures,” said the second person quoted above. “The information sought does not look very relevant for the purpose of assessment.”