I-T wants to fish out more info on foreign investors

After a flurry of probing questionnaires over the past few months, the income tax (I-T) department has held back assessment orders on several foreign portfolio investors (FPIs) to fish out more information on them from jurisdictions such as Mauritius.

While the matters, mostly relating to the financial year 2021-22, became time-barred on March 31, 2024, the tax office has invoked the provision under the law to buy more time on the grounds that efforts are underway to obtain more facts.

The final assessment orders have not been issued to around 10 funds, industry sources told ET.

“Probably, they were not convinced by the responses from the FPIs, and are keen to establish their case of ‘lack of substance’ in the fund structures in the tax havens,” said a banker.

According to Rajesh Gandhi, partner at Deloitte India, which advises many offshore portfolio managers, in some selective cases assessments have been kept on hold and information has been sought from Mauritius under the inter-government exchange of information arrangement.

“In such cases, the tax officer gets another year to pass the assessment orders. It is not clear what additional information has been sought from Mauritius,” said Gandhi.

Taxman Puts Some FPI Assessments on Hold for More Info

The final assessment orders pertaining to FPIs were keenly awaited this year given the detailed nature of queries from the tax officials. ET had reported a month ago that some of the funds were asked whether they had borrowed money to trade on stock exchanges; a few notices had asked the FPIs to share minutes of old board meetings held years authorising the purchase and sale of securities and as well as the opening of bank accounts in Mauritius. Most funds were told to disclose their “beneficial owners” and “authorised signatories”.

“It’s likely that the tax office may share the information with the capital market regulator. However, the I-T has accepted the explanations given by many funds,” said another person.

If the department intends to prove the age-old suspicion that the funds (which have been picked for further enquiry) have been running just a paper outfit in Mauritius with actual decision-making happening in New York or London, then it would need the cooperation of Mauritius authorities to fish out more data. Such inadequate ‘substance’ would be a ground to question tax benefits that FPIs enjoy under the treaties India has with Mauritius and Singapore.

As per these tax treaties, FPIs from these financial centres pay no tax on gains from equity futures and options trading on exchanges here. Besides, under the revised terms of the treaties, there is no tax on FPIs’ capital gains made on the sale of shares that were purchased before April 2017.

Harry Byrne

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