Home World Economy Custodians may have to pay up for FPI tax liabilities

Custodians may have to pay up for FPI tax liabilities

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MUMBAI: The tax department and the capital market regulator could be looking to fix responsibility on custodians, banks or agents of foreign portfolio investors (FPIs) in cases where the fund breaches domestic laws, two people with direct knowledge of the matter said.

The move is for seamless compliance with General Anti Avoidance Rule (GAAR) as tax authorities want custodians or banks to pay tax in case there are disputes and FPIs refuse to pay up. “Both the Central Board of Direct Taxes (CBDT) and Securities and Exchange Board of India (SEBI) are looking to articulate in what ways representative assessee (custodians, banks, agents) could be held responsible,” a person with direct knowledge of the matter told ET.

“Under Section 160 of the Income Tax Act, responsibly of custodians or any agent of FPIs could be fixed but there is still an ambiguity as it is based on an interpretation. There is a concern that tax department may want to hold custodians responsible under GAAR if the FPI is found to have no substance and is liable to pay tax in India,” said Suresh Swami, Partner, PwC India. Another person in the know added that regulators are exploring options before the government in case FPIs refuse to pay GAAR or shut shop before the liability arises on past gains.

“What happens if an FPI winds up before the GAAR liability arises, who would pay the tax then? Can the government freeze the assets of the custodian or the bank who have remitted money to the FPI?” he asked. However there are fears the move could spook custodians who maintain they are mere agents and government must directly deal with the FPIs.

“Provisions of representative assessee, in current context, typically apply to the payer of the income to the non-resident. In case of FPIs, capital gains income is received by them on the floor of stock exchanges from unidentifiable buyers of securities. Local bankers or custodians merely remit the proceeds to the FPIs overseas after paying due taxes and hence may not be considered as the agent or the representative assessee of the FPIs,” said Punit Shah, partner, Dhruva Advisors.

“Currently most custodians or banks that represent FPIs withhold taxes to be paid to the Indian government before disbursing the money to the FPIs.
However, since no custodian or bank is sure of any post facto scrutiny including application of GAAR, it may not be fair to recover taxes leviable upon FPI afterwards,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

GAAR is the direct taxation regulation that came into force on April 1 this year. The regulation mainly penalises foreign investors who only invest in India through another country to avoid paying domestic taxes. Apart from taxation, regulators may also be looking at fixing not just tax liability of representative assessees, hinted one of the people quoted above.

“CBDT and Sebi are looking at fixing responsibility of various stakeholders on non-compliances by FPIs around investment limits, KYC, tax payments and that if a fund closes, it becomes difficult to catch. So government is looking at custodians, bankers, compliance officers etc,” he said.

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