Foreign investors who have purchased shares in Indian companies are reportedly receiving reassessment notices from the Income Tax Department, even if they have not earned any taxable income such as dividends, interest, or capital gains. Tax experts emphasize that these notices do not automatically imply tax liability but require a timely and well-documented response.
Why Are Foreign Investors Receiving Notices?
The Income Tax Department's reporting and risk management systems are the primary drivers behind these reassessment notices. According to CA (Dr.) Suresh Surana, notices under Section 148 of the Income-tax Act are triggered when the department believes income may have escaped assessment. This can happen simply because a foreign investor acquired Indian shares, obtained a Permanent Account Number (PAN), or was reflected in remittance and transaction reporting systems, even without filing an Indian income tax return.
It is crucial to understand that the mere purchase of shares or securities in India does not, by itself, create taxable income. Tax liability generally arises only from income generated, such as capital gains from selling shares, dividend income, interest income, or any other income deemed to accrue or arise in India under the Income-tax Act.
Responding to Income Tax Reassessment Notices
Experts strongly advise foreign investors not to ignore these notices. A detailed response must be filed within the prescribed timelines, clearly explaining the nature of the investment and confirming that no taxable income has arisen in India. If an income tax return was not filed, the reason should also be provided.
Supporting documents are vital and may include:
- Investment agreements
- Share certificates
- Valuation reports (where applicable)
- Form 15CA/15CB (evidence relating to remittances)
- Board approvals for the investment transaction
- Bank remittance documents
- Tax deduction details (if any)
- Explanation for non-filing of Income Tax Return (ITR)
A well-prepared response can demonstrate that the transaction was purely an investment and did not result in any income chargeable to tax in India, potentially resolving the matter at an early stage.
Understanding Section 148A and Section 148
The reassessment process typically involves two stages. Section 148A is the preliminary stage where the Assessing Officer provides the taxpayer an opportunity to explain why reassessment proceedings should not be initiated. The tax officer shares the information leading to the belief that income escaped assessment and considers the taxpayer's explanation before deciding whether to proceed.
Only after this preliminary exercise and obtaining the necessary approvals can a formal notice under Section 148 be issued. This notice requires the taxpayer to furnish a return for the relevant assessment year, formally commencing the reassessment proceedings. Section 148A serves as an important protection mechanism, aiming to ensure that reassessment notices are issued only after an initial verification of facts.
Compliance Burden Concerns
Tax professionals have raised concerns regarding the compliance burden these notices place on foreign investors, especially when no taxable income has been generated. They argue that reassessment proceedings should focus on cases where income has truly escaped assessment, and not merely on investment transactions. A timely and thoroughly documented response is key to mitigating prolonged proceedings and demonstrating that no taxable income has arisen in India.