BACKGROUND:
Non – residents, more particularly Non – resident Indians have been historically doing large scale investments in India. This blog is for them. It talks about the exposure to Income Tax scrutiny or litigations that may come along with significant transactions done in India. It also covers precautions that can keep these investors away from such unnecessary tax disputes. Further, it also discusses the stages of tax dispute resolution and how one should handle it in case if a tax dispute arises or has already arisen.
The intention is to make the document easy for a layman to understand. Readers should be able to understand things easily, which will eventually help them.
Historically, NRIs have invested in India in large volumes. The following are some of their favourite investment options.
- NRE Fixed Deposits
- Mutual Funds
- Listed Equities
- Real Estate in cities like Mumbai, Ahmedabad, Delhi, Pune, Bangalore, etc.
Before talking specifically about the potential Income Tax Disputes, let us get an overview of level at which the Income Tax Department is exercising vigilance.
USE OF TECHNOLOGY IN INDIAN INCOME TAX ECOSYSTEM:
In the last 15 years, India has increased its use of technology in Income tax compliance and vigilance substantially. From e-filing of income tax returns, e-processing of the income tax returns, issuance of refunds, detection of tax evasion, procedures related to tax disputes, etc., are taking place through the portal of the Income Tax Department. India has set the benchmark for the world in this dimension.
The link of this portal is – https://www.incometax.gov.in/iec/foportal/
Keeping this in mind, now let us discuss the reasons why NRI investors may have to face tax disputes.
COMMON CAUSE OF UNNECESSARY TAX DISPUTES IN CASE OF NRI INVESTORS:
1. Non – filing of tax returns:
Mostly, NRIs not having Indian Income above basic exemption limit do not have to mandatorily file tax returns in India. Hence, many NRIs who are only buying investments and not selling it, and are not having any other incomes in India, do not file tax returns in India for that year.
2. Big Investments getting reported to the Income Tax Department
When NRI purchases investments like Mutual Fund or property or Fixed Deposits, etc., these transactions are linked to their Permanent Account Number (“PAN”). Banks/Government Offices/Other institutions involved in handling records of these investments have to report these financial transactions to the Income Tax Department against PAN of the investors. Income-tax Act, 1961 of India (Indian Income-tax Law) requires banks, property registrars, custodians, etc. to report these SFTs to the Income Tax Department. They have to report when value of these transactions exceeds specified limit. For example, for property dealing the value is Ra. 30,00,000 per property transaction.
3. Non – filing of return and presence of Significant Financial Transaction a cause
These cases where one has not filed the ITR but has a Significant Financial Transactions are flagged by the risk management strategy (“RMS”) of the Income Tax Department. The rationale is “how someone who does not have income has funds to do SFTs?”
If the case is flagged in RMS, the Income Tax Department selects such a case for verifying the nature of these investments/SFTs and the source of funds. Example – Mr. A from the USA purchased a flat in Mumbai worth 3 crores by remitting funds to India from the USA. He did not file a tax return for the financial year 2023 – 24 because he had no income in India. Now, such cases have a chance of getting flagged by RMS. If flagged, the Income Tax Department can send a notice and seek an explanation and evidence to prove the source and the nature of SFTs. Therefore, obvious strategy to mitigate the risk is to file tax returns in India when you have done significant financial transactions. Regardless of amount of your Indian Income.
FREQUENTLY ASKED QUESTIONS:
1. How does one come to know if a notice is issued?
Generally, the Income Tax Department sends real time updates on communications issued to the taxpayers, uploads these communications to the portal (Link given above), and sends emails to the registered email addresses. The best way to keep track is to create an account on the portal and check the e-proceedings tab of the portal periodically. Also, updating active contact details and address in your profile on the portal can ensure that notices reach you.
2. What does the Income Tax Department usually check if a notice is issued for the reason of significant financial transactions and non-filing of tax returns?
In these circumstances, the Income Tax Department usually asks taxpayers to explain the nature of significant financial transactions and to prove the source of these transactions.
3. How to prove the nature and source?
Nature and source of these transactions can be proven by presenting evidence of these transactions and also providing evidence of the money trail, clearly establishing the money trail.
Example – if a non-resident has purchased a flat worth Rs. 3 Cr in Mumbai by sending inward remittances from abroad out of his accumulated funds, he can produce the following documents to the Income Tax Department.
- Sale deed of the flat to prove that investment is in nature of buying of property.
- Entries from the bank statement showing how funds were paid to the seller of the flat. Debit Entries of the statement of account used for paying the seller.
- Entries from the bank statement showing from where the funds were credited to the bank account. To show how funds have been received.
- Debit entries of foreign bank account. One may argue that non – resident’s foreign bank account would be beyond scope of Income Tax Law of India. However, such a stand can be debated by the income Tax Department.
- Evidences of Inward Remittance like SWIFT, Remittance Advice etc.
- If non – resident has sourced them out of their foreign incomes, tax clearance
certificates will enhance the trust of Income Tax Department.
(This is the illustrative list. Focus should be on proving that funds utilized in investments are from legitimate sources after paying appropriate taxes wherever applicable. Mere claiming it would not work. Claims must be backed by documentary evidences.)
These evidences with summary of money trail in simplified form should help in explaining the nature and source of significant financial transactions.
4. What if one fails to establish nature and source of SFTs?
In that case, the Income Tax Department may assume that the whole value of SFT is unexplained investment/money and may levy tax @ 60% (Excluding Surcharge and Cess) of the transaction value. Additionally, they may levy heavy penalties.
5. What are the remedies under the provisions of the Act if the Assessing Officer has already completed the scrutiny/assessment? Whether after evaluating tax payer’s documents or otherwise.
Once the case is selected for scrutiny, the assessing officer, after considering explanations of the taxpayer, will issue the draft order proposing the additions of income, if necessary. The taxpayer should present his documents explaining nature and source to the assessing officer. The draft order will be issued after considering these documents.
A non – resident can file objections against the draft order with the Dispute Resolution Panel (DRP) within 30 days from the date of service of the draft order. The taxpayer will have to file necessary papers with the DRP in support of his objections. The DRP, after considering taxpayer’s submissions, will issue directions to the assessing officer. The assessing officer will then have to pass the order in accordance with the directions of the DRP. If taxpayer is not satisfied with order of the assessing officer, he can file appeal with the Income Tax Appellate Tribunal (ITAT) directly within two months from the end of the month in which the assessment order is received.
If non – resident does not file objections with the DRP against the draft order, the
assessing officer will pass the final assessment order. Against such a final assessment order, appeal lies with the Commissioner of Income-tax (Appeals) (CITA). This appeal needs to be filed within 30 days from the date of receipt of the order. If taxpayer is not satisfied with the outcome of the matter at CIT-A level, he can file
matter with the ITAT.
If tamper is not satisfied with outcome of the matter at ITAT level, he can file appeal with High Court. If the dispute is only on facts, appeal cannot be filed to HC and ITAT’s order will be final. If dispute involves question of law then only appeal can be filed with the HC.
6. What are the precautions which a non – residents should keep?
a. File ITR in India: Even if not mandatory, filing your income tax return is advised. Large financial transactions without a return may trigger scrutiny.
b. Monitor for Notices: Regularly check the Income Tax portal for any notices related to past years.
c. Respond Calmly to Notices: If you receive a notice, don’t panic. It typically seeks clarification on the nature and source of your financial transactions. So instead of getting panic, good strategy is to cooperate and file evidences.
d. Maintain Proper Documentation: Be ready to provide:
o Indian Bank Account Statement
o Remittance records showing funds sent from abroad
o Foreign Bank Account Statement
o Proof of Foreign Income
e. Address Issues Early: Aim to resolve any questions with lower authorities by providing clear documentation and explanations.
f. Seek Professional Help: Cases will likely involve Sections 68/69 of the Income Tax Act, 1961. Expert advice is crucial.
g. Cooperate with Your Consultant: Even if certain document requests seem trivial, follow your consultant’s guidance.
h. Stay Informed: Create an account on the income tax portal and regularly check for any communications from the department.
DISCLAIMER:
The content published on this blog is intended for general informational and educational purposes only. It is not a substitute for professional financial, tax, or legal advice. Reading or interacting with the content on this blog does not create a client-professional relationship. For specific tax-related concerns, readers should consult a qualified tax consultant, chartered accountant, or legal advisor. While we strive to provide accurate and up-to-date information, income tax laws and rules change frequently. We do not guarantee the completeness, accuracy, or reliability of any information provided in the blog. The blog authors and website owners shall not be held responsible for any loss, damage, or inconvenience arising from reliance on the information published on this site. Some blog posts may contain links to external websites. We are not responsible for the content or reliability of those sites and do not necessarily endorse any views expressed within them. Tax laws vary by country and region. The content is generally relevant to India unless otherwise stated. Readers in other jurisdictions should refer to local tax laws or seek localized advice. We reserve the right to update or change the content and this disclaimer at any time without notice.