Many well-heeled Indians who own stocks and properties abroad or are beneficiaries of offshore trusts may come under the glare of the income tax (I-T) department for failing to spell out their ‘indirect investments’. Indirect investments are the next level investments — or, holdings in other overseas companies — by the entity in which the resident Indian is a stakeholder. Consider an individual holding 15% equity interest in an unlisted offshore firm (A) in Dubai, which in turn is a shareholder in three US companies (B, C and D).
According to the department, indirect ownership in B, C and D has to be disclosed in the income tax return along with the investment in A. The tax office, sources said, has asked a few “high-profile individuals” to explain why they did not disclose their indirect investments because under the law the Indian resident is the ultimate beneficial owner (UBO) of all the companies. Non-disclosure of information could attract a penalty of at least Rs 10 lakh; and, if the taxman is not satisfised with the response, it can invoke the new law against black money.
“To define the term ‘beneficial ownership’, Section 139 of the Income tax Act was amended. The new definition, which attempted to cover indirect ownership as well, came into effect from April 1, 2016. As a result, investment in a structure outside India which in turn has made downstream investments in other structures world over is being covered under the new clause. So long as the Indian resident has substantial stake or voting power or control over board to decide the downstream investment may be covered under the amended definition.
The initial investment by a resident in an overseas firm is done under the liberalised remittance scheme (LRS) of the RBI, which allows any resident to remit up to $250,000 a year to buy stocks and properties among other assets outside India. “A ‘beneficial owner’, as per the law, means an individual who has provided, directly or indirectly, consideration for the asset for future or immediate benefit. The definition is wide and it tends to include indirect ownership,” said Mitil Chokshi, senior partner, Chokshi & Chokshi.
The department has come to know about the downstream investments with the US government sharing information on downstream companies that are incorporated there. Since 2012, Indian taxpayers are required to disclose additional information on overseas assets such as joint bank accounts with children who are studying abroad. However, the interpretation of ‘beneficial ownership’ is throwing up new challenges on disclosures. The view on the subject, it is understood, is not uniform across the tax department and many tax officials would prefer the CBDT to clarify certain queries related to beneficial ownership.