Asset manager Parag Parikh, which runs two retail outbound GIFT funds, has advised investors that the holdings should be disclosed as ‘foreign assets’ in Income tax return (ITR). However, in an FAQ, the fund house DSP, offering a global equity fund from GIFT, said investors are not required to disclose such investments in ITR’s ‘Foreign Assets Schedule’ as they hold units of a fund domiciled in India.
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Since 2012, residents have to disclose ownership in foreign securities, properties, and beneficial interest in offshore trusts in FA schedule in the ITR form.
DSP further said that since the global stocks are held by the fund (and not investors directly), it’s the fund that would disclose them under the FA schedule in its ITR. Edelweiss, the third GIFT retail asset manager, did not comment on the matter.
The GIFT City International Financial Services Centres is a ‘foreign territory’ as far as the Foreign Exchange Management Act (FEMA) goes, but is a domestic region under I-T Act. Investments in a GIFT fund requires bank transfer of foreign currency under the Reserve Bank of India’s liberalised remittance scheme (LRS) which allows a resident individual to invest and spend up to $250,000 a year.
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Investment in a GIFT fund lowers a person’s LRS limit by that amount.
Play Safe?
Tax professionals advising investors and funds are also divided on the issue. According to Rajesh Gandhi, partner, Deloitte, “While the I-T Act does not expressly address the treatment of investments in GIFT City funds for this purpose, IFSC funds present a regulatory dichotomy: they are Indian tax residents under I-T Act, but treated as overseas investments from FEMA and RBI perspective. In the absence of specific guidance, a conservative compliance approach would be to disclose such investments in Schedule FA, particularly since the investments are reported as foreign assets by Indian entities in their RBI annual FLA (foreign assets and liabilities) return.”
Given a choice many investors may prefer avoiding the FA schedule as mention of foreign assets in ITRs raises the risk of tax department scrutiny. Also, assessees with foreign assets are required to file a different and detailed ITR form. However, incorrect reporting or failure to disclose foreign assets attract penalties.
Agreeing with DSP, chartered accountant Ashish Karundia, said “The fact that GIFT City is treated as a foreign jurisdiction under forex regulations doesn’t mean the same automatically applies under I-T Act. The two laws serve different purposes, and a legal fiction created under one law cannot be extended to another unless the law specifically provides for it. So, residents aren’t required to disclose GIFT investments in Schedule FA.”
Since investors in GIFT Alternative and VC Funds, and Portfolio Management Services, have to also deal with the issue, some have asked IFSC Authority to clear the air with the tax department, a senior fund official told ET.
Given the taxman’s whims, some like Gandhi prefer playing it safe. Rajesh Shah, partner at Jayantilal Thakkar & Co, specialising in FEMA and tax, said, “Foreign asset disclosure is an area of concern. Residents with even bank accounts in GIFT should treat it as foreign asset as remittance is under LRS and TCS is collected by banks. It’s wiser to disclose the way I-T department thinks rather than take a bold approach of not disclosing under FA schedule.”
Fund distributor Harsh Thakkar said that in such matters intermediaries like them ask investors to consult their tax advisors.