The Indian tax office has asked several Mauritius-based private equity (PE) funds to share their minutes of board meetings, deal agreements, residency and addresses of directors, and names of ultimate beneficiaries amid suspicions that unnamed persons call the shots in these funds while the boards and managements of the tax haven entities merely serve as dummies.
If the income tax (I-T) department has good reasons to believe that a fund's 'place of effective management' (or POEM in tax parlance) is somewhere else-where the key decision makers are located -and not Mauritius, many funds could find themselves exposed to large tax demands.
At least seven PE funds have received notices from the international division of the Mumbai I-T office over the past two months, two sources told ET. The tax department wants to know the tax residencies of the real faces behind the Mauritius asset managers and fund investors. "Men who are controlling the funds may be in the US or even in India, while the directors in the Mauritius vehicle could just be the fronts. In that case, can these investment vehicles in Mauritius claim tax benefit under the India-Mauritius treaty?," one of them asked.
Change in Provision after April 1, 2017
Till 2017, investors from Mauritius paid no capital gains tax on securities sold in India since under the treaty capital gains could be taxed only in Mauritius and the latter imposed no tax. Under the revised India-Mauritius tax protocol which changed this, April 1, 2017 was fixed as the cut-off date to introduce a grandfathering provision. According to this, all shares bought prior to this date, would not attract capital gains tax irrespective of when these securities are sold in future.
Funds that have come under the taxman's lens avoided capital gains tax on the grounds that shares were acquired before April 1, 2017. But that's not enough, according to tax assessing officers who suspect that the POEM of these investors is not Mauritius. For instance, if persons actually in control of a PE are US residents, then the PE may be asked to pay capital gains tax as the tax is not exempted under the treaty between India and USA. Or, if the men pulling the strings are based out of India, the PE could be treated as a 'resident' entity and be asked to pay the tax a local investor forks out after booking profits on stocks.
Follow: Ngulminthang
