Fresh Tax Notices to FPIs over Capital Gains

The I-T department has asked multiple foreign portfolio investors (FPIs) to cough up more taxes on their capital gains after denying set-off and tax treaty benefits, people aware of the development said. The notices were issued by the Centralized Processing Centre (CPC) of the I-T department under Section 143(1) of the Income-tax Act.

The intimation under Section 143(1) informs taxpayers about initial assessments carried out by the tax department and points out discrepancies in tax filings, and demands additional taxes, if any.

Intimations demanding additional taxes primarily cited three reasons, the sources said. Either the FPIs have been disallowed to set off long-term capital gains against short-term capital losses, or the tax department has not taken tax treaties into consideration, or in some cases, it has categorized short-term capital losses incurred by FPIs as gains, they claimed.

Many tax experts suspect that this could just be a technical glitch in the system, but even so the FPIs will now have to approach either the Commissioner of Income Tax (Appeals) or litigate the matter.

“The law allows long-term capital gains to be set off against short-term capital losses,” said Rajesh H Gandhi, partner at Deloitte India.

“If such set-offs are denied, it could result in significant tax demands for FPIs, requiring them to litigate the matter. Hopefully this is a technical glitch and would be reified soon.”

In other cases, the tax department has not taken tax treaties into consideration while demanding tax from FPIs. All FPIs that are covered by India’s bilateral tax treaties and attract much lower taxes-of 10% to 15%-than of they are not protected through tax treaties.

In several other cases, the tax department has categorized short-term capital losses incurred by FPIs as gains, sources said. So, instead of getting deduction on such amounts, they have been asked to cough up taxes.

“Taxpayers have raised concerns with respect to the Centralized Processing Centre erroneously treating Short-term capital loss as short-term capital gains and taxing the same,” said Sameer Gupta at EY India. “There have been other issued, too around gains which were subject to tax at 50% of the domestic tax rate,” he said.

“The remedial measures adopted by taxpayers for the above include filing of rectification application and also parallels seeking recourse through and appellate process,” Gupta said. ET could not independently verify whether the tax notices were a result of a technical glitch or change in stance or any other issue related to FPIs. An email query sent to the CBDT and the FM did not elicit any response as of press time Thursday.

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