Introduction
The rapid growth of the International Financial Services Centre (“IFSC”) established at Gift City has opened new avenues for Indian resident investors to access global opportunities. Investment in IFSC-financial products has become increasingly common. Consequently, a recurring question that arises during the Income Tax Return (“ITR”) filing season is whether the investment in an IFSC is required to be disclosed under the Schedule FA (Foreign Assets) of the ITR of resident individuals.
Although, the Central Board of Direct Taxes (“CBDT”) has not issued any specific clarification addressing the Schedule FA reporting requirement for investment in IFSC, an analysis of the provisions of the Income Tax Act, 1961 (“Income Tax Act”) and the applicable governing framework provides useful guidance. The issue assumes greater significance in light of the recent expansion of the scope of Annual Information Statement (“AIS”), which now includes information regarding the foreign assets and foreign income of the taxpayer that is being received through international information sharing arrangements.
This article analyses the compliance landscape considering the CBDT’s expansion of the AIS with specific focus on the ambiguity regarding the disclosure of IFSC investments under the Schedule FA of the ITR and the practical considerations supporting a conservative reporting approach in the absence of clear guidance.
Understanding of Schedule FA and the IFSC Reporting Dilemma
The Schedule FA is a disclosure schedule in the ITR applicable to taxpayers who qualify as Residents and Ordinary Residents (“ROR”) to report their foreign assets and income from sources outside India.
The Schedule FA requires details such as foreign bank and custodial accounts, equity or debt interest in entities, insurance or annuity contracts, immovable property, capital assets, financial interests, signing authority in foreign accounts, trusts, and any other foreign-sourced income.
The confusion stems from the unique legal framework governing IFSC. Under the Foreign Exchange Management Act, 1999 (“FEMA”) and the regulations issued by the Reserve Bank of India (“RBI”), investment in IFSC units is considered overseas investment and thus comes under the Overseas Direct Investment (“ODI”) and Liberalized Remittance Scheme (“LRS”) frameworks. This means that the investment is subject to the applicable FEMA and RBI reporting requirements.
Although the Income Tax Act provides various tax benefits to companies and funds operating from the IFSC, it does not explicitly state whether the IFSC is considered foreign territory for the purpose of making Schedule FA disclosures or whether the investment in such entities qualifies as ‘foreign assets.’
Factors favouring a conservative reporting position of IFSC Investments
Since Schedule FA is governed by the Income Tax Act and not by FEMA, an investment company incorporated under the Companies Act, 2013 and registered in the IFSC represents an investment in an Indian company from the perspective of the Income Tax Act. Though such a company may enjoy special regulatory treatment under FEMA and the IFSCA framework, it continues to be incorporated under Indian law as per the Income Tax Act.
However, the Income Tax Act is silent on this issue, the following factors support voluntary disclosure:
- Investments in IFSC are treated as overseas investments under FEMA and RBI regulations.
- Such investments are made through the ODI/ LRS framework, which is ordinarily applicable to overseas investments.
- Indian entities report similar investments under RBI reporting requirements, including the Foreign Liabilities and Assets Return framework (FLA).
- The CBDT is increasingly relying on data received through international information sharing arrangements to identify reporting mismatches.
In addition, the Income Tax Department has also begun issuing SMS communications reminding taxpayers to accurately disclose overseas investments in Schedule FA. While taxpayers have traditionally sought to avoid reporting under Schedule FA due to the additional disclosure requirements and the perception that reporting foreign assets may increase the likelihood of scrutiny. However, the tax authorities possess corresponding information may expose taxpayers to avoidable notices, inquiries and, where applicable, penal consequences under the Income-tax Act.
With the expansion of the scope of AIS, any inconsistency between the information available with the tax authorities and the disclosures made in the ITR may invite further examination. So, taxpayers should adopt a cautious approach while reporting IFSC investments in Schedule FA as it is a prudent compliance measure.
Conclusion
While the Income Tax Act does not expressly require disclosure of investments in IFSC in Schedule FA, neither does it provide a specific exclusion. Given that investments in IFSC are treated as overseas investments under the FEMA and RBI framework, a conservative approach would support disclosure in Schedule FA.