QFI FAQs: Hopes Dashed?

The Indian custodian industry has been waiting for more than a year now for clarifications from the CBDT on matters relating to taxation of Qualified Foreign Investors (QFI). There are existing circulars from SEBI and RBI which require the Qualified Depository Participants (QDP) to comply with the withholding provisions under the Income-tax Act (ITA).

Broadly, the QDPs / investors were demanding the following:

a) Doing away with the requirement for obtaining of PAN by a QFI

b) Removal of the burden cast on QDPs for deducting tax at source from profits earned by QFIs

After months of silence, the CBDT has finally issued a set of FAQs which seek to clarify the tax related matters for QFIs. We are pleased to share with you our Alert on these FAQs.

As predicted by us more than 3 months back, the Govt has clearly retained the burden of almost all tax compliances on the shoulders of the QDPs. Also, the requirement for obtaining PAN by QFIs stays.

The various circulars issued in the past read with the latest FAQs clearly cast a lot of responsibility and liability on QDPs. It is imperative that QDPs take utomost care while deducting tax from profits earned by QFIs. Interpretation of judicial decisions and Double Tax Avoidance Agreements, accurate application of TDS rates, accurate computation of income and tax deductible thereon, proper setting off of losses and several other seemingly small but important matters need to be taken care of. Even the smallest of defaults would render a QDP liable for stringent action on the part of the tax department as QDPs are clearly considered as Representative Assessees of QFIs. Any error of omission, commission or judgement on the part of a QDP would land itself in deep trouble.

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