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Income tax department sends notices to investors over tax treaty gains
February, 28th 2018

The income tax department has sent notices to about 100 Indian investors, family funds and family trusts to ascertain whether tax treaty benefits accrued by them in the past were genuine.

The tax notices issued in February have asked investors to submit details of the treaty benefits. Investors fear that this could be a precursor to the next step when the taxman may start demanding taxes in some cases. Investors who route their investments through tax havens like Singapore, Mauritius or Cyprus tend to get the benefits of tax treaties that India has signed with these countries.

These treaties mainly deal with tax rates investors need to pay in either of the destinations. The tax notices viewed by ET has sought details of the computation of foreign tax relief accrued by investors, along with the taxes paid. Tax experts said that in some situations the tax returns were even filed and accepted by the tax department.

“Many investors have started receiving tax notice pertaining to financial year 2014-15 wherein the revenue department wants to check whether treaty benefits are properly claimed by the investors. In the subsequent years, foreign tax credit rules were operationalised which provide the conditions to claim credits and the department may be keen to see if such conditions have been met in FY14-15 as well,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.

The tax department has stated in the notices that the demand was made under Section 90 and Section 91 of the Income Tax Act –– which basically deal with foreign treaty benefits. “Under Section 90/91 of the Income Tax Act, the tax department can check the treaty benefits accrued by individuals, especially high networth individuals, who may be setting off taxes paid outside India against domestic tax liabilities. While there was a recent AAR (Advance Authority of Ruling) ruling which allowed grant of credit in such situations by the employer, these notices could be followed up by tax demands if adequate documentary evidence cannot be provided,” said Rajesh H Gandhi, partner, Deloitte India.

According to the people in the know, some Indian companies and private equity funds too have received such notices.

This comes at a time when, in a separate AAR ruling, an existing tax treaty of a foreign investor was disallowed. ET had on February 14 reported that AAR had disallowed grandfathering benefits to a company routing its investments in India through Mauritius.

The ruling had denied any benefit of the India-Mauritius tax treaty under which the applicable rates are a bit lower. If investments were made before the amendment of the tax treaty in 2016, benefits were grandfathered— that is, income from such investments or capital gains would attract concessional tax rates prevalent before 2016.

“We do not wish to appear regressive or against promoting healthy and fair investment and business. Yet, a line has to be drawn somewhere,” the AAR ruling said.

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