The move would ensure that the tax department will get ready information on all cases where there could be a tax risk, which is a better way of ensuring compliance than by going after only big transactions reported in media such as Vodafone's Dutch arm pruchasing Hutch Essar from a Cayman Islands entity in 2007 for $11 billion.
The RBI is informed only when companies either bring money into India or send out of the country. Even regulatory filings by listed companies about their offshore transactions are vague, incomplete and lack essential details that the tax authority requires to examine for possible tax liability, explained a department official, who asked not to be named.
If there is a statutory requirement to report indirect transfer of Indian assets, and it is not complied with, we could take action for concealment of income, said the official. Penalty for this could be as high as three times the amount of tax sought to be evaded, if the current proposals are implemented.
One of the thoughts being voiced by field officials is that the proposed reporting requirement should be made applicable for at least six financial years in the immediate past, the tax assessment for which period can be reopened by the department.
Tax officials recently reopened the 2006-07 assessment for Cairn India claiming tax liability from the 2012 changes to the Income Tax Act that had retroactive effect.
In the absence of compulsory reporting of offshore deals, it is very difficult for the authorities to keep track of all the offshore transactions that take place, say experts.
It is hard to find instances of indirect transfer of Indian assets by monitoring changes in the register of shareholders that every company is expected to maintain as it may not be the immediate shareholders that change in cases of indirect transfers, but the shares in the entities several layers above, said Amit Maheshwari, partner, Ashok Maheshwary & Associates.
The proposal for compulsory reporting of indirect sale of Indian assets comes at a time when it appears the 2012 retroactive amendments to the Income Tax Act meant to tax past transactions are likely to stay.
Despite talking disapprovingly of the retroactive amendments to the law by leaders of the ruling NDA, no sitting Parliamentarian has promised the 2012 amendments would be repealed, said a finance ministry official. Finance minister Arun Jaitley indirectly hinted at that possibility in a statement after meeting business leaders on June 6, which said one of the suggestions received from businesses was to have no retrospective amendments in tax laws 'henceforth' .