Several FPIs, AIFs get tax notice for errors in returns

The Income Tax Department has sent notices to dozens of foreign portfolio investors (FPIs) and alternative investment funds (AIFs), flagging discrepancies in their tax returns.

These tax red flags include errors in capital gains tax computations, erroneous declarations, suppression of income and wrong exemption claims, people with direct knowledge of the matter told ET. The notices were sent in October and up to November 15 and largely relate to tax returns for FY22.

A senior Income Tax (I-T) Department official estimated the tax discrepancies aggregated to about ₹13,000 crore, adding that digital data integration is helping spot errors and evasion. "We are in the process of sending more notices," the official said, adding that while some notices have questioned capital gains tax computations, others relate to lapses in filing.


Capital Gains Tax Calculations
FPIs and AIFs that have filed capital gains tax at the lower 15% surcharge have been getting these notices, said people aware of the matter.

Tax experts said some of the notices could be errors, as computerised processing may have applied the wrong surcharge or not considered the treaty benefits claimed by the assessees.

"The 37% surcharge does not apply to capital gains from sale of listed shares. In fact, Budget 2022 has capped the surcharge to 15% even for long-term gains on the sale of unlisted shares," said Rajesh Gandhi, partner, Deloitte. "This could probably be an error and, hopefully, will be rectified soon so incorrect demands raised against taxpayers are nullified."

PwC partner Bhavin Shah said, "There have been many cases where surcharge in case of FPIs have been levied at 37%, instead of 15% capped for capital gains and dividend income. FPIs are now applying for rectification or reprocessing to get this corrected."

Changes in Surcharge

Tax department sources admitted there may be some errors. "The notices have details. This is a standard procedure and they will get adequate time to respond with facts," said the income tax official cited earlier.

The surcharge has seen several changes in the last year, which may have caused confusion.

In the 2022 budget, a standard 15% surcharge was imposed on long-term capital gains on the transfer of any type of assets. Earlier, it ranged from 15% on listed equity shares and units, among others, to 37% for other assets.

Over the past few years, all regulatory agencies, including the I-T Department, have stepped up scrutiny of foreign funds over tax evasion and round-tripping concerns.

FPIs usually route their investments through favourable tax jurisdictions and a significant portion of these flows are from non-resident Indians and persons of Indian origin.

"The tax department is focusing on new areas like gaming, asset management and asset reconstruction companies for the last year," another tax official told ET.