The authorities are now asking for details such as the specifics of office spaces, electricity bills, the roles and expertise of directors and employees in Singapore and Mauritius, locations of decision-making, and a thorough review of board meeting minutes.
In some cases, the tax department has gone so far as to check directors’ details on LinkedIn to verify their residence in Singapore or Mauritius.
Historically, India-focused funds have been structured via pooling vehicles in Mauritius or Singapore.
Tax authorities are questioning these structures, suspecting they are being used to avoid paying by exploiting capital gains tax benefits in India’s agreements with these countries.
Consultants dealing with such cases say the emphasis this time is on the actual substance of transactions, rather than just the documentation, in order to determine their eligibility for ‘grandfathering benefits.’ It is a fact that some of these entities are just “post box” offices created for tax treaty benefits.
Going forward, a key aspect will be how the authorities interpret and evaluate details provided. Depending on their conclusions, the authorities may impose additional tax demands, which could significantly affect the overall returns of the funds.
Venture capitalists feel that the government should provide clearer guidelines reflecting the distinctive nature of their operations.
Siddarth Pai, founding partner of 3one4 Capital and co-chair of the Regulatory Affairs Committee, Indian Venture and Alternate Capital Association, said the investing industry was unique, as compared to services or manufacturing, in terms of personnel and physical requirements.
“Billions of dollars are often managed by teams of three to four people from shared coworking spaces or small offices,” he said. “There is no correlation between fund size or returns with team size or physical Infrastructure. Clarity on such matters is essential as the investing industry is extremely varied and diverse in terms of structure and practise.”
Tax professionals also suggest the revenue department provide clarifications regarding the treaty and allow some leeway