ED scrutiny raises spectre of harassment
The spectre of investigations has alarmed firms looking for overseas investments.
ED, the agency that probes money laundering, have also started issuing notices to some individuals who have invested in Indian companies through investment arms registered abroad.
The spectre of investigations has alarmed firms looking for overseas investments, said tax experts. They added that much of the investments are genuine, as the government has plugged most of the loopholes used earlier for routing money through foreign jurisdictions, they said.
“With the government amending the tax treaty with Mauritius, combined with the regulations on POEM (place of effective management), many concerns around round-tripping have been addressed. Yet, we continue to see queries from the RBI and ED. Both individuals and firms are being questioned without distinction, and often some of the most credible companies have been put under the lens,” said Dinesh Kanabar, CEO of tax consultancy Dhruva Advisors.
Questioned by I-T Dept Too
The government amended the tax treaty with Mauritius in 2016, removing the tax arbitrage on capital gains. Under POEM rules, overseas subsidiaries are treated as domestic entities for tax purposes if they are controlled and managed from India.
In one case that the RBI is looking into, notices have been issued to an Indian company that had set up a foreign investment arm after putting in $10,000 a few years ago. The foreign arm borrowed about $50 million, which was then invested in the Indian company. The company has been told that this funding breached the overseas direct investment regulations, said a person with direct knowledge of the matter.
In another instance, an Indian promoter had set up a company in the British Virgin Islands about 10 years ago and transferred around Rs 100 crore over the years. The foreign entity had its own business, which was profitable. This BVIbased company later invested around Rs 500 crore in listed and unlisted Indian companies. “The company was told to sell the shares and pay capital gains tax,” said another person with direct knowledge of the matter.
Industry trackers said the authorities’ focus on round-tripping has intensified in the recent past, which has spooked several companies and individuals. “The government and the RBI are keeping a close watch on round-tripping and trying to ensure that unaccounted funds parked abroad as well as money remitted outside India by corporates and resident individuals — even if FEMA-compliant (Foreign Exchange Management Act) — do not come back as investments through tax haven jurisdictions,” said Dilip Lakhani, a senior chartered accountant.
ET had reported on August 27 that the ED had started questioning several resident Indians about downstream investments made by foreign companies where they hold equity stakes. The ED notices come months after the income tax department questioned the same set of investors on these investments under the provisions of the legislation seeking to curb black money.
Fearing investigation, companies are now reaching out to tax and legal experts before seeking investments from abroad. One company, for instance, is taking legal opinion as to whether an investment by an American firm that also has an Indian entity could be construed as roundtripping, said a person.
Often, the biggest worry for companies is the time taken to resolve cases.
“Even in cases of overseas entities with Indian investments borrowing money to deploy funds in India, questions are being raised over round-tripping,” said Kanabar of Dhruva Advisors.