The Income Tax (I-T) Department is now going after fund houses and private equity funds for alleged underreporting of income through misuse of tax treaties. The department has reopened old assessment cases against such entities.
Last week, fund houses were asked to furnish details such as the structure of their business, past investors and bank signatories. They were also asked to explain irregularities in the calculation of income for the assessment year 2014-14, 2014-15, and 2015-16, according to an Economic Times report.
Notices were sent after the department found earlier explanations unsatisfactory. The I-T Department wants to probe into settlements and returns. The IT Department estimates that Rs 300 crore income may have gone unassessed so far, the report added.
Earlier explanations by those under the scrutiny were found to be unsatisfactory after which notices were sent by the government which wants to probe further into income statements and returns. The assessment notices were issued under Section 148 of the I-T Act, which caters to unassessed income. Under its provisions, the taxman may probe past assessments as far back as 10 years if concealment of income is pegged at Rs 50 lakh or above.
Most of the funds invested in Indian by global private equity players were routed through Mauritius and Cyprus during the assessment years. The tax department wants to know why weren’t these funds invested directly into India but routed through other jurisdictions, the report said quoting unnamed sources.
It is to be noted that the government may cancel the Tax Residency Certificate (TRC) of an entity if it is found abusing tax treaty benefits and treaty shopping.
According to OECD, treaty shopping refers to an attempt by a person or entity to indirectly access the benefits of a tax treaty between two contracting countries without being a resident of one of those jurisdictions.
India’s Double Taxation Avoidance Treaty with Mauritius made companies based in the island nation exempt from paying capital gains on Indian shares sold by them to investors. This was used to offshore entities to evade billions of dollars in taxes. However, the treaty with Mauritius was amended in 2017.
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.
