If the signatories are residents, there is concern that the tax office may question the tax status of the funds offered under treaties with key jurisdictions like Mauritius and Singapore.
FPIs trading on Indian stock exchanges do not pay tax on derivative trade profits, unlike resident investors who face a tax rate of 32-40% on such gains. Additionally, FPIs do not pay capital gains tax on profits from the sale of stocks purchased before April 2017.
Under these circumstances, FPIs whose treaty claims are challenged could potentially face demands from the income tax department if their entities in tax havens are found to lack substance or if they are funneling funds to evade taxes on derivative trades.
However, professionals believe that while such practices are not impossible, they are not widespread.
Agencies
“India’s treaties with Singapore, Mauritius, and other countries exempt tax on derivative income for foreign funds. However, Mauritius and Singapore, being preferred jurisdictions for investments, may face more scrutiny. Planning around this is challenging due to restrictions on Indian residents investing in global funds with less than 50% exposure to India,” said Rajesh Gandhi, partner at Deloitte India.
The funds, including global and India-specific FPIs, were asked by the income tax office to provide copies of registration certificates with the capital market regulator and application forms submitted to custodians. They also need to share details of depository and client accounts in India, authorized signatories, and bank account information.
The funds must explain the basis for claiming treaty benefits and provide copies of tax residency certificates from offshore financial centers like Mauritius and Singapore.
Previous notices in October 2023 asked FPIs to disclose the top 20 parties contributing to their fund corpus and explain how they attract investors.
In the latest notices, funds were required to provide a list of beneficial owners as per the Prevention of Money Laundering Rules, 2005, which is shared with custodians.
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