The international taxation arm of the income tax (I-T) department has sought details of end beneficiary subscribers of participatory notes (P-notes) from some leading offshore derivative instrument (ODI) issuers in the country.
According to a senior tax official, the I-T department suspects that these instruments are being used to legalise unaccounted money.
The issue came up when taxmen found certain discrepancies in the disclosures made by ODI issuers. Nearly half of a dozen p-note issuers could come under scrutiny.
“Details mentioned in the Know Your Customer (KYC) disclosures were not tallying with the tax authority’s database. We need more information from the issuers to ascertain if any law has been violated. We will get the data in the next few weeks,” the official said.
The move comes in the wake of amendments in tax treaties with Mauritius and Singapore. Till now, all the investments coming from these countries were exempt from short-term capital gains (STCG) tax.
However, STCG tax will be levied even on these transactions. Exploiting the tax arbitrage, investors from around the world invested in Indian equities through shell entities in these countries.
Besides, the tax department is also keeping an eye on those entities that recently shifted or are in the process of shifting their base to countries that have a double-taxation avoidance treaty or special tax treaties, such as France, Sweden or Netherlands, allowing investors to avoid paying tax in India.
Routing investments through these countries would negate the impact of the General Anti-Avoidance Rule (GAAR) — which came into effect from April 1.
“Shifting base to other countries is one of the concerns that has created ripples with the tax authorities. Investing in India via these countries which have special treaties could derail the government’s tax target,” said Amit Maheshwari, partner at Ashok Maheshwary and Associates LLP.
P-notes have been under the radar of various Indian regulatory and enforcement authorities because of lack of transparency.
P-notes are essentially ODIs issued by the brokerages registered as foreign portfolio investors (FPIs) with the Indian market regulator market regulator the Securities and Exchange Board of India (Sebi). These are considered a way to take indirect exposure to Indian markets
and are typically taken up by investors whose exposure is low and they want to minimise compliance cost.
However, the absence of enough checks and balances in terms of disclosures led to the misuse of the route, as investors channelised their unaccounted money into equities through ODIs. Sensing the abuse, a special investigation team (SIT) urged the government to tighten the regulatory framework for p-notes.
In 2016, Sebi tightened the regulations for p-notes. Under the new rules, Sebi had increased the KYC requirements, issued curbs on transferability, and prescribed more stringent reporting for p-notes issuers and holders. It also mandated issuers to follow Indian anti-money laundering laws instead of norms prevalent in the jurisdiction of the end beneficial owner.
Tax experts believe that despite tightening laws, such routes are still being misused. “In today’s time of black money and round-tripping of funds, the efforts of law enforcement agencies to seek details of ultimate or real beneficial owner of funds are understandable. Possibilities of some Indian-origin funds trying to come back to the country through such routes cannot be ruled out,” said Sanjay Sanghvi, partner, Khaitan and Co.
According to data from Sebi, the total value of the p-note investment in the Indian markets
— equity, debt and derivatives — was Rs 1.78 lakh crore at the end of March 2017. P-notes accounted for 6.6 per cent of total FPI in the country. The share of p-notes in the overall FPI assets has been coming down because of tightening of disclosure-related norms.