How India's taxmen are chasing global PE funds for misusing tax treaties to evade capital gains tax
The income tax department has reportedly slapped an over Rs 500 crore tax demand from big global funds, including private equity and venture capital funds, for misusing tax treaties with Mauritius, Cyprus and Singapore and underreporting income. While investing in start-ups in India, private equity funds either take the traditional route of investing directly or through a special purpose vehicle (SPV) set up outside India, usually in tax- and investor-friendly jurisdictions such as Mauritius, Singapore and Cyprus.
"When a PE makes a direct investment in an Indian company, generally withholding tax provisions are applicable if there is a secondary purchase (i.e. transfer of shares from existing shareholders) made by the PE.. PEs also invest in Indian companies through a SPV located outside India in a tax- and investor-friendly jurisdiction. The exit normally takes place through a sale of shares of the SPV outside India, say to another non-resident," explain Uday Ved and Amitabh Khemka of KNAV.
Currently, PE funds that are based out of India are subject to capital gains tax in India. Private equity funds, which deal in unlisted companies, attract long-term capital gains at 10%, while short-term capital gains is levied at 30-40%.
Tax authorities have given orders to at least 12 global funds last week, and initiated proceedings against them because most of the investments were routed through tax havens like Mauritius and Singapore, instead of direct investment in India.