income tax: Taxman’s demand for PAN details of key people puts FPIs in a spot

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A new rule by Indian tax authorities this year is posing a hurdle to leading foreign investors including sovereign funds and pension funds investing in the country.

The tax department has made it mandatory for all non-individual tax filers to mention the PAN number of authorised signatories in the income tax returns along with their signature. Tax experts advising overseas funds said this requirement is impacting the foreign portfolio investors (FPIs) structured as non-corporate trusts and association of persons (AOPs) the most.

Trustees and partners of overseas funds, who are foreign nationals, are reluctant to obtain a PAN card since it would make them an Indian taxpayer, they said. There are also data privacy concerns since these foreign nationals would have to provide their personal documents as a part of the Know Your Customer (KYC) requirements.

An email sent to the Income Tax department remained unanswered.

“Once you have a PAN card, you have to file IT returns every year irrespective of whether or not you have any reportable income in India,” said a senior tax consultant, who advises foreign funds.

Several foreign funds are learnt to have moved the Central Board of Direct Taxes (CBDT) seeking an exemption from the PAN requirement. The funds are also learnt to have asked for an extension in the deadline for filing the returns. The deadline to file income tax returns for FY21 is December 31.

In non-corporates such as trusts, an authorised signatory can only be the trustee of the fund. In case of partnership firms, partners of the fund house can be the signatories.

“The requirement of a digital signature for uploading of the returns is causing challenges in filing of the returns for non-corporate FPIs as the digital signature requires a PAN,” said Anish Thacker, partner tax and regulatory services, EY.

There are currently over 10,000 registered FPIs in India and industry estimates suggest nearly 40% of the FPIs registered in India are structured as trusts. Some of the prominent sovereign funds and pension funds are trusts too. Tax experts said the trustees of these funds are top ranking government officials or even elected representatives in their home countries.

The compliance challenges don’t end with the trustee obtaining a PAN card. “If there are any discrepancies, tax department will have powers to go after the PAN card holders brining personal liability into picture,” said the senior tax consultant quoted above.

In the case of foreign funds structured as corporates, they can appoint domestic representatives such as lawyers as authorised signatories. This allows the domestic representative to sign the tax returns and put in his PAN number.

“Directors of FPIs structured as corporates have been exempted from the need to get a PAN while signing the FPI tax returns,” said Rajesh Gandhi, partner, Deloitte India.

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