The Securities and Exchange Board of India (Sebi) has asked the Central Board of Direct Taxes (CBDT) to specify the obligations of the ‘authorised representative‘ (AR) of an overseas fund. Fund houses want the government to clear the air since an AR would have to deal with the tax office if the FPI faces a tax demand.
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Under the new income-tax (I-T) rules, an FPI registering with Sebi to trade on Indian stock exchanges must name either an AR or a ‘representative assessee’ (RA). The name of the person acting as the AR or RA is to be mentioned in the common application form (CAF) that FPIs file to register, obtain permanent account number (PAN), and complete KYC for bank and demat accounts.
However, most external professionals and fund employees are unwilling to be named as AR/RA without knowing what the responsibilities are. As ET had reported on March 20, this stems from concerns that they could be construed as ‘agents’ and held liable for unpaid tax. Many overseas fund employees are reluctant to share their passport copies and be named as representatives in tax office records.
“There has been a lot of noise around this since there is no clarity on what are the obligations of the person whose name is given in the form. How does it work? What does it entail? What does it mean when you really name someone as AR or RA? These are questions we have as well. We are actively engaging with CBDT, scheduled meetings with senior authorities in CBDT,” said Aparna Thyagarajan, chief general manager, Sebi, at a webinar with FPIs last week.
Asked whether the authorities would make a distinction between an AR and RA, she said, “We are in dialogue with CBDT. Very soon we should be able to clarify,” she said.
THE UNPREDICTABLE TAXMAN
While CAs, lawyers, Big4 firms and other consultants, acting as ARs to collect tax notices or represent FPIs in proceedings may not face problems, they are awaiting a clarification amid fears over how the tax department may question treaty benefits claimed by an FPI or invoke the general anti-avoidance rule (GAAR).
In the regular course, taxes on capital gains from stock sale, interest earnings, and dividend income are deducted before FPIs remit money out of India. However, after the reassessment order on the American quant trading firm Jane Street and the Supreme Court’s ruling against the US investor Tiger Global (giving more choices to tax officers), together with the taxman’s occasional strident stand, anyone representing a foreign investor would like to have more clarity on possible obligations and liabilities. Besides FPIs, direct investors like foreign venture capital funds have to appoint AR/RA.
However, according to chartered accountant Ashish Karundia, an ‘AR’ and an agent of a non-resident are distinct concepts and should not be conflated. “An agent assumes tax liability on behalf of the non-resident. In contrast, an AR does not necessarily bear any tax liability. For instance, a person who is merely related to a non-resident and not employed by or otherwise connected in the manner described in Section 306(1) of the I-T Act, cannot qualify as an agent. Since such a person may still act as an AR without incurring any corresponding tax liability, no specific clarification from the CBDT may be needed,” said Karundia.
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Meanwhile, Sebi is trying to make things easier for FPIs-probably, spurred by large equity sell-offs. These include faster clearance of applications, giving FPIs more time to report material changes, and a clearer rule to identify beneficial owners. A master circular is expected in May. Accompanying Ms. Thyagarajan, other Sebi officials who participated in the webinar, organised by financial services group Nuvama, were Siddarth K Dachalwal, Sharath Ellagonda, and Nikki Agarwal.
“By focusing on risk-based KYC review, and beneficial ownership disclosures on genuinely high-risk, opaque structures, SEBI aims to reduce frictions for broad-based, low-risk funds. This is in line with the regulator’s long-term goals of easing market access,” said Richie Sancheti, a lawyer specialising on investment funds and asset management.
Asked whether Sebi was reviewing the granular disclosure norms, Ms. Thyagarajan said it was too early to comment. The rule requires an FPI which is overexposed to stocks of any group, to disclose the ultimate beneficial owners, down to the last natural persons, behind all its investors.
Overseas funds wary of exposure to potential tax liabilities