Taxman issues fresh notices to FPIs for ‘defective’ returns

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Mumbai | Published: June 1, 2015 12:34:12 AM

A source said there was a conscious attempt to compel FPIs to mention some number under income statement and balance sheet to compute their MAT liability

fpiThe FPIs have 15 days from the date of receipt of notices to re-file their returns with the requisite changes, failing which they run the risk of having their returns being “rejected” or tax returns considered “not having filed”. (Reuters)

The revenue department has issued fresh notices to a substantial number of foreign portfolio investors (FPIs) early last week, terming their assessment year (AY) 2014-15 tax returns “defective”. These notices are over and above those issued by the Dispute Resolution Panel (DRP) about 10 days ago.

Confirming that 30-40 foreign funds have received such notices, sources said that in one of the schedules attached to the tax returns, the income statement (profit and loss) and balance sheet amount was filled as zero, indicating the FPIs did not have any profits on the book and,  therefore, no tax liability.

“There is a conscious attempt by the revenue department to compel FPIs to mention some number there to be able to compute what the minimum alternate tax (MAT) liability would be. Otherwise, we do not see a reason for them to keep issuing notices,” said one of the sources familiar with the development.

They said this was the second time such notices have been issued to FPIs. The first set of notices was issued sometime in April, to which foreign funds replied and re-filed their returns.

The FPIs have 15 days from the date of receipt of notices to re-file their returns with the requisite changes, failing which they run the risk of having their returns being “rejected” or tax returns considered “not having filed”. This could eventually lead tax offices to levy monetary penalties and possibly spark another round of litigation, sources said.

“We engaged in discussions with the tax office but nobody wants to comment or take any responsibility. One section of the department advised to ignore the notices but that these are formal notices and cannot be ignored. All this is creating a lot of frustration in the way of doing business,” sources said, adding that FPIs may re-file the same returns and hope they are not rejected.

About 10 days ago, the DRP had issued notices to FPIs, stating that MAT disputes would begin soon, leading to some kind of panic as the Central Board of Direct Taxes (CBDT) had put the disputes on hold until further directive from the government and the Supreme Court (SC) ruling on pending cases.

Six foreign funds filed their petitions with the Bombay High Court in April-May 2015 against retrospective MAT demands by the IT department. These include Aberdeen Asset Management, National Westminster Bank, and BNP Paribas.

The IT department had sent notices to over 68 FPIs claiming tax worth Rs 602.83 crore for past capital gains. The notices mean that FPIs will have to pay tax at an effective rate of 18.5% plus surcharge and cess as applicable on business income or ‘book profit’ with retrospective effect, replacing the capital gains tax framework.

Under the current norms,  foreign institutions are not required to pay any tax on long-term capital gains (gains from investments exceeding one year). Institutions are liable to pay short-term capital gains tax (tax on investment less than one year) at 15%.

The issue escalated in the second fortnight of April with FPIs collectively pulling out $1.8 billion from the cash segment of stock markets. FPIs encompass all foreign institutional investors, their sub-accounts and qualified foreign investors under a new regime that came into force on June 1, 2014. The Securities and Exchange Board of India (Sebi) data show over 8,200 FPIs registered in the capital market.

While FPIs based in Singapore and Mauritius can avail of full treaty benefits to ward off tax demands, treaties with the UK and Luxembourg do not completely exempt them from capital gains.

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