Mumbai: The taxman is snooping around for Indians behind foreign institutional investors (FPIs).
In a slew of unusual and probing questions, tax authorities have asked several offshore funds to spell out how they go about raising money, share of Indian investments in the fund pools, and details of top investors in a fund. At least a dozen FPIs have received notices over the past few weeks from the income-tax (I-T) department trying to extract information on who was running the funds and from where, two persons familiar with the queries told ET.
Resident Indians can only invest in FPIs whose exposure to India is less than 50% while total subscription by non-resident Indians (NRI) cannot exceed 50% of a fund corpus.
While the tax office has from time to time enquired to figure out whether FPIs were dodging tax by taking advantage of beneficial tax treaties between India and other countries or determine a fund’s place of effective control (POEM), what has surprised many is the intrusive nature of the recent round of questions.
Some of the information sought by the I-T department may require FPIs to even go beyond the stringent disclosure levels set by the capital market regulator Securities & Exchange Board of India (Sebi).
Here are a few questions from two such notices dated October 16 and October 30: “Please explain how you approach investors for subscribing to your FPI fund with supporting documents”; “Can Indians also invest in the fund? If yes, please segregate the number of participants/AUM (assets under management) as originated from India”; “Please prove the genuineness of your source of funds with the following details – name and addresses of top 20 parties from whom remittances were received;” “Where are the trading terminals located, from where are the orders placed,” etc.
MORE DEMANDING THAN SEBI
While regulators and tax and enforcement authorities have been taking a closer look to spot Indian faces behind FPIs as well as overseas private equity and venture capital funds following the US short-seller Hindenburg’s allegations against the Adani Group in January, the questions from the I-T offices precede important state elections and the scheduled evaluation of India (after more than a decade) this month by the Financial Action Task Force , global body to combat money-laundering.
As part of a stricter disclosure regime, from this year FPIs will reveal the identities of the last natural persons behind fund investors having 10% or more beneficial ownership (BO). “But the tax authorities seem to be asking for disclosing top 20 investors without any ownership threshold filter. This is in addition to the scrutiny of aspects concerning the decision-making process followed by FPI, location of trading terminals, order placement and trade settlement processes followed, etc. Such scrutiny now adds more to the complexity of getting the FPI investment structure right,” said Richie Sancheti, founder of the law firm Richie Sancheti Associates.Other Details Sought
Other details sought from FPIs (which have received the recent notices) are: how and from where the fund is managed, the team size for managing the fund, details of name, address, qualifications of the fund managers, how the trades are confirmed and settled, taxability in the hands of the participants of the funds, and copies of various submissions made to Sebi about participants of the funds.
“There are case laws and department circulars holding that TRCs (tax residency certificates) should be sufficient proof for claim of treaty benefits, but tax authorities seek information about control and management as well as source of funds to ascertain whether there is any round tripping and ascertain whether there is actual substance in the entity claiming tax treaty/other benefits. With the advent of POEM and GAAR (general anti-avoidance rule) provisions, tax benefit claims are going through more and more scrutiny every passing day and the incisive questions raised in these recent questionnaires aim to further that,” said Ashish Mehta, partner at Khaitan & Co.
Questions around POEM crop up when tax officials suspect that while a fund is formed in a treaty jurisdiction like Mauritius, Singapore or The Netherlands to claim certain tax benefits, its key decision makers are somewhere else, maybe even in India.
The notices served under Section 142 (1) of the I-T Act also require the FPIs to submit their certificate of incorporation under specific law in the foreign country, copies of bank statements for the relevant year (for which I-T department is taking a relook at the funds’ tax outgo), and scrip-wise statement for short-term and long-term capital gains, ledger statement and sample contract note for each stock broker.
