FPIs, PEs face risk of increased I-T department action

The regulatory risk for foreign portfolio investors (FPIs) and global private equity (PE) funds in India could rise following an announcement in the budget that was clarified on Monday. The income tax department can now go after these funds for violations that go back up to 10 years. Until now it used to be six years.

The budget proposal said the I-T department will not have powers to reopen a tax assessment if it’s more than three years old. However, the government created an exception to this rule—if income worth more than Rs 50 lakh had escaped from tax and this involved ‘assets,’ then the authorities can initiate proceedings for the extended period of 10 years.

FPIs and PE funds had expected that shares and securities would not be regarded as assets. But the amended Finance Bill now says that assets will include shares and securities, and loans and advances, bringing large funds under the ambit of the 10-year time period.


Low Monetary Threshold
“FPIs, PEs primarily deal in securities and hence effectively taxmen can now be able to open investigations for violations that go back 10 years,” said Amit Maheshwari, managing partner and international tax lead at Ashok Maheshwary & Associates. “The time limitation on regulatory agencies for prosecution is a key parameter for various global funds while examining regulatory risks since having longer time periods will increase the uncertainty for them.”

Until now, if the tax department found a discrepancy in the income tax return filed by an FPI, the department could initiate proceedings only if it wasn’t more than six years old. It will henceforth be empowered to open up an investigation even if the discrepancy is as old as 10 years.

The types of transactions that would be covered under the ambit of these rules include capital gains tax, tax on dividend income and tax earned on profits made in the derivative markets among others. “The proposed amendment may provide a backdoor avenue for reassessment proceedings to be sought to be initiated even on a ‘change of opinion’, which has been judicially held not to be a valid reason,” said Vineet Nagla, partner, White & Brief Advocates & Solicitors. “As a matter of fact, on account of introduction of faceless assessments, the chance of escapement of income is reduced, and technically, the scope of re-assessment should have been restricted, but it appears that the scope of re-assessment has instead been expanded.”

Another key factor that would pinch the foreign funds is the low threshold specified, since typically they own securities to the tune of billions of dollars, experts said.

“While certain additional safeguards have been introduced to check reopening of tax cases, an extended period of 10 years with low monetary threshold of Rs 50 lakh is a cause of concern and will increase uncertainty,” said Sumit Mangal, partner, L&L Partners.

The finance minister had announced in the February 1 budget that the reduction in the timeline for prosecution by the tax department to three years was meant to improve ease of doing business.

Tax experts say India already has one of the longest timelines compared with other emerging markets or even developed markets.