Taxmen seek details on possible misuse of P-notes

The Income Tax Department's international arm is seeking details of end-beneficiary subscribers of participatory notes (P-notes) from some leading offshore derivative instrument (ODI) issuers in the country.

I-T Department believes that these instruments are being used to turn black money white, according to a media report. Discrepancies were found in the disclosures made by ODI issuers, which triggered the search.

P-notes are instruments that are issued by registered foreign institutional investors (FIIs) to foreign investors interested in investing in the Indian stock markets. The foreign investors need not register themselves with the market regulator, SEBI.

“Details mentioned in the Know Your Customer (KYC) disclosures were not tallying with the tax authority’s database. We need more information from the issuers to ascertain if any law has been violated. We will get the data in next few weeks,” a tax official told the Business Standard.

The development comes soon after the Indian government took measures to tighten tax treaties with Mauritius and Singapore, which were earlier hotspots for foreign portfolio investors (FPIs) to avoid paying taxes.

Till now, investments from these countries were exempted from short-term capital gains (STCG) tax. Investors from around the world invested in Indian equities through shell companies in these countries to benefit from the tax arbitrage.

Now, however, these STCG tax will be levied on these transactions as well.

The media report further says that the tax department will closely watch companies that have recently shifted base or are in midst of shifting base to countries that have special tax treaties – like France or Sweden – that allow investors to avoid tax payment in India.

Routing of funds through other such counties could also negate the General Anti-Avoidance Rule (GAAR), which was implemented April 1 onwards this year.

P-notes were being misused to route unaccounted money through ODIs and absence of proper regulatory checks intensified it. The Securities and Exchange Board of India tightened the regulations for P-notes in 2016.