With the new government coming into power in 2014, there has been an increase in the focus on attracting foreign direct investment (FDI) into India. The government has been focusing and making all-out efforts through various initiatives like "Make in India", "Digital India" etc. to make India an attractive destination for investments. According to Department of Industrial Policy and Promotion (DIPP), the total FDI inflows soared by 24.5 per cent to $44.9 billion during FY2015, as compared to $36.0 billion in FY2014.
As the government presses the accelerator for attracting FDI, it becomes increasingly essential for the allied departments to complement the efforts. One of the key departments, which are directly aligned with the efforts for attracting foreign investment, is the Income Tax Department. There is no denying that more FDI reaches those countries, which rate higher on the "ease of business" scale and how the tax regulations of a country are. The entire process of income tax litigation plays a very important role in determining "ease of business".
There has been a few major tax controversies in recent past in India, which had an impact on the overall FDI into India, Key amongst them have been the Vodafone case of indirect transfer - from transfer pricing perspective, retrospective amendments etc. The above aspects had an adverse impact on the overall image of India in terms of ease of doing business, as the same were reflecting "uncertainties" in terms of tax policies in India.
It is seen in recent scenarios that Income Tax Department has started scrutinizing FDI in more detailed manner in reference to Section 68 of the Income Tax Act, 1961. They have started more focus on the sources of the fund and reason behind premium on shares paid by the foreign investors. As per Section 68, where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the income-tax officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The Income Tax Department in assessment of the companies are asking about the investors details, their balance sheet, bank statement to understand the genuineness and source of the fund. To obtain all this information, it has becoming a challenging task for the investee company. It is also seen that in case satisfactory information is not provided by the investee company, then cases may also be referred to Foreign Tax & Tax Research Division, which may lead to a cdelay in process of assessment of the companies. Even as we speak, cases under tax controversies under the above scenario are running in thousands of crores.
With India getting momentum in getting FDI, the detailed question by the Income Tax Department on FDI may raise complexity for the investors. Tax authorities should focus on speedy completion of assessment, and also process for exchange of information during assessment should be further simplified. More efforts should be made by tax authorities to collect information from common sources, like Reserve Bank of India, Registrars of Companies etc, and assessments should commence post such information has already been analysed. The same can go a long way in bringing "ease of doing business" and thus attracting more investment.(Amit Jindal is partner at Felix Advisory)Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.