Global Fund Houses Receive Reassessment Notices From IT Department
Tax Exemption

The Income Tax (IT) department reopens various old assessments related to several private equity funds and global fund houses reporting less income by misusing the tax treaties. The IT department has questioned fund houses to provide information regarding the past investors, the structure of their business, and bank signatories.

The department has urged the fund houses to explain the irregularities recorded in the income computation for the assessment years 2013-14, 2014-15 and 2015-16. Most of these global private equity funds have been invested in India via Cyprus and Mauritius during the assessment years. The department is keen on knowing why these funds had not been invested directly but via a particular jurisdiction.

As the explanations given by the fund houses earlier were found unsatisfactory, the department has sent the notices. The IT department intends to investigate deeper into income returns and statements. The reassessment notices have been issued under Section 148 of the Income Tax Act, which takes care of income that has missed assessment.

As per the rules and regulations, the IT department can look back up to 10 years to scrutinise the past assessments if the concealment of income is worth Rs 50 lakh and above. Also, the department qualifies to reject a Tax Residency Certificate (TRC) when there has been an abuse of treaty shopping and tax treaty benefits.

Most of the global funds directed their investments in India through jurisdictions such as Singapore and Mauritius that permitted them to avail capital gains tax exemption. Nevertheless, India revised the tax treaty with Mauritius with effect from April 1, 2017, taking back the exemption. Currently, capital gains tax will apply to these funds. Private equity funds dealing with unlisted firms will be charged 10% for long-term capital gains and 30 to 40% for short-term capital gains.

Even though the securities transaction tax has been paid, foreign portfolio investors (FPIs) investing in listed firms will be charged 10% on long-term capital gains concerning equities sold via exchanges.

As per tax experts, this move could bring uncertainty for investors. A fresh tax demand related to such old investments could be a challenging task for fund managers since they may not be in a position to recover taxes or penalties via investors who could have exited the fund already.

When old matters are revisited, it could create tax uncertainty among foreign fund houses when successive measures concerning impermissible arrangements have been put in place. These matters need to be seen prospectively and should not get retrospective elements into the picture by way of such a back-door basis.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in

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