FPIs quizzed on 'loans' for trading

The move to fish out such information could well be to trace any possible and indirect links between overseas portfolio managers with Indian companies and promoters, feel some of the tax and finance professionals.

“Interest paid by a non-resident lender to a non-resident borrower can also be taxed in India if the debt is used for a ‘business’ in India. But, this doesn’t happen in the case of FPIs,” said Rajesh Gandhi, partner, .

'No clarity on tax implications'
“Perhaps, the other aspect which tax authorities could be trying to examine is whether there is any round-tripping of Indian money into FPIs directly or indirectly through the debt route,” said Gandhi.

In fact, while directing FPIs to share details of the capital contributors in the funds, tax officials have enquired about the “source of fund of the entity which contributed the capital or provided loan” and whether any were taken by the capital contributors.

“Usually we have not seen questions around lending transactions in the context of FPIs because it’s difficult to understand what could be the tax implications of the same. Since an FPI only earns capital gains in India and no business income, one would need to see how the assessments in these cases evolve,” said Keyur Shah, partner and leader financial services, tax and regulatory, EY.

The I-T department has the authority to look into the source of a source to trace the money trail, said Bhavesh Gandhi, co-founder of Incorp Advisory Services Pvt Ltd, a tax and consultancy service provider. “But there is no real tax implication unless the fund has claimed the interest outgo on such loans as deduction to pay a lower tax on capital gains,” he said.

The current notices, served over the past three weeks, add to a slew of probing queries (reported by ET on February 20) that the I-T department has been raising since early January to figure out whether the FPIs have adequate presence — ‘substance’ in taxman’s parlance — in Mauritius and Singapore or were simply running paper offices to claim tax benefits allowed under the treaties between India and these jurisdictions.

For instance, one of the notices asks a fund to provide minutes of board meetings held years ago, for approving the purchase of shares in India, sale of the securities as well as for authorising the opening of a bank account in Mauritius.

Under the revised treaties, FPIs from these financial centres do not have to pay tax on capital gains made on sale of shares which were bought before April 2017. Besides, such FPIs even today pay no tax on the money they make on derivatives . Thus, technically funds having no ‘substance’ in the treaty countries can be denied the tax exemptions.

“However, so far we have not received any order making tax claims on the funds despite the queries. In one case, the department had asked for the first meeting of the board of directors undertaken after incorporation in Mauritius. Now, this was more than a decade ago,” said another person advising some of the funds.

In the earlier set of notices, the I-T office had also enquired about the “beneficial owners” of funds and “authorised signatories” — information that is typically compiled by fund custodians and shared with the capital market regulator.