Tag: I-T Department

The Income Tax Department has reopened old assessments of at least a dozen global fund houses and private equity funds alleging under-reporting of income through the misuse of tax treaties.

The department, in a communication last week, asked these fund houses to furnish details about the structure of their business, past investors and bank signatories, an official told ET.

The department has asked them to explain irregularities in computation of income for the assessment years 2013-14, 2014-15 and 2015-16, the official said.

Its early estimates peg income that allegedly escaped assessment at more than ₹300 crore, the person said.

The notices were sent after earlier explanations by the funds were found unsatisfactory by the department, which wants to look deeper into income statements and returns. The reassessment notices were issued under Section 148 of the I-T Act, which deals with income that has escaped assessment.

Under the rules, the tax department can go back up to 10 years to scrutinise past assessments if the concealment of income is ₹50 lakh and above.

Most Investments via Mauritius, Cyprus
“Most of these global private equity funds invested in India through Mauritius and Cyprus during these assessment years,” said the official. The department wants to know why these funds hadn’t invested directly but through a particular jurisdiction, he said.

The department reserves the right to reject a tax residency certificate (TRC) if it detects abuse of tax treaty benefits and treaty shopping. The Central Board of Direct Taxes (CBDT) didn’t respond to queries.

Most global funds channelled their investments in India via jurisdictions such as Mauritius and Singapore that allowed them to enjoy capital gains tax exemption. However, India amended the tax treaty with Mauritius effective April 1, 2017, withdrawing the exemption.

Capital Gains Tax
These funds are currently subject to capital gains tax. Private equity funds, which deal in unlisted companies, attract long-term capital gains at 10%, while short-term capital gain tax is levied at 30-40%.

Foreign portfolio investors (FPIs) that invest in listed companies attract long-term capital gains at 10% for equities sold on the exchanges, even if securities transaction tax has been paid.

Tax experts said the latest move could create uncertainty for investors. “Any fresh tax demands on such old investments could create challenges for fund managers because they may not be able to recover taxes and penalties from investors who might have already exited the fund,” said Rajesh H Gandhi, partner, Deloitte Haskins & Sells LLP.

Foreign investors have been hoping that, as a result of certain favourable court cases and specific protection under the General Anti-Avoidance Rule for investments made before 2017, past investments would not be challenged, he said.