Income-Tax notices give FPIs the jitters; experts suspect tech glitches

The income-tax (I-T) department has slapped hundreds of notices on foreign portfolio investors (FPIs) in the past few days for allegedly filing defective returns, according to the country's top tax consultants. 

The notices, issued under Section 139 (9) of the I-T Act for past assessment years, have asked them to rectify the defects and furnish their balance sheets along with profit and loss accounts, even though they are not required to do so under current regulations. This is because FPIs earn capital gains and dividend income in India but are not involved in running a business or any professional activity, and do not have any permanent establishment in the country.

Experts called the development unprecedented and attributed it to a possible glitch in the new I-T portal.

“FPIs are upset with the notices as they perceive it to be tax enquiries coming from the I-T department, and do not view it as a technical glitch,” said a person in the know. The fiasco, he added, had the potential to further tarnish India’s image among overseas investors, who had been wrong-footed in the past by the country’s uncertain tax regime.

An email sent to Infosys regarding the glitch did not elicit a response.

Anish Thacker, partner at EY India, said, “Notices for older assessment years seem to have been regenerated and resent. Our teams have reached out to officials at the Centralised Processing Centre, which has told us that it is a technical glitch.”

“This issue had cropped up in the past but not on this scale. Notices are being resent even after submitting a response for the past years. We are unsure if this is solely due to a technical glitch in the new tax portal or if there are other reasons for it," added Sunil Badala, partner and national leader of BFSI tax and regulatory, KPMG India.

A notice for defective return could be sent for sundry reasons such as not submitting the returns in the prescribed format, not attaching the relevant books of account, claiming TDS as refund, and not providing complete income details.

Assessees are usually given 15 days to rectify the defects, failing which it is deemed that they have not filed any return of income.

Responding to the latest notices, most tax consultants have said FPIs are not required to file their books of accounts in India. In some cases, they have chosen not to respond to the notices, especially if these have not been separately served on the assessees.

“If the returns are treated as invalid, there could be far-reaching consequences for investors in the form of penalties and denial of refunds,” said Badala.

FPIs plan to make a representation to the Central Board of Direct Taxes (CBDT) through their tax consultants on the matter soon.  

The finance ministry had recently summoned Infosys Managing Director Salil Parekh over troubles with the new I-T e-filing portal. The website has been marred by glitches since its launch on June 7. The company has been told to resolve the issue by September 15. Currently, there are more than 10,000 FPIs registered in India.