Tax authorities are also investigating the cases where high valuations may suggest that closely-held Indian companies were used to channel undisclosed funds back into the country. (File Photo) Offshore entities and non-resident Indians (NRIs) are increasingly coming under the tax department’s lens, with authorities seeking detailed explanations for their investments in unlisted shares. Investors have been asked to furnish information on the origin of funds as well as valuation reports to justify the price at which such shares were acquired. According to a report from The Economic Times citing industry insiders, this increased scrutiny follows a directive requiring all private companies to convert their shares into dematerialised form by June 2025. This move has enabled the Income Tax (I-T) department to access a richer pool of data, making it easier to track transactions and ownership patterns. Authorities are closely examining deals where shares were purchased below fair value, which could invite tax implications under direct tax laws and the Foreign Exchange Management Act (FEMA). On the other hand, investments made at unusually high premiums are also being flagged, as they may indicate potential money-laundering or round-tripping of funds, added the ET report. In recent weeks, tax officials have sought extensive information from non-resident investors regarding transactions carried out between the financial years 2019-20 and 2022-23, as per the report. "Persons receiving such notices should respond promptly and diligently, explain the entire transaction along with requisite documents around the source of funds, valuation adopted, including valuation reports obtained under applicable laws, reason for non-filing of tax returns, if asked," said Ashish Mehta, partner at the law firm Khaitan & Co. in the report. Many non-resident investors who do not earn income in India often skip filing income tax returns (ITRs). However, the requirement of a permanent account number (PAN) for opening demat accounts has now brought such individuals into the tax net. Some have already been questioned on why they failed to file returns. "Earlier reopening notices were directly issued, and taxpayers would either have to go through the rigmarole of assessment proceedings or challenge such notices in court. However, presently the law, under Section 148A, requires tax officers to first issue a precursor to a reopening notice, seek taxpayers' response, and then decide whether it is a fit case to reopen or not," said Mehta in the report. Tax authorities are also investigating cases where high valuations may suggest that closely-held Indian companies were used to channel undisclosed funds back into the country through questionable transactions such as under-invoicing exports or over-invoicing imports, states the report. According to Rajesh Shah, partner at Jayantilal Thakkar & Co, "The department is thoroughly investigating the actual beneficial owners behind the investments, especially from the UAE and tax haven islands, where the valuation is high compared to the fair market value of the Indian company." He added in the report that dematerialisation has made it significantly easier to trace large transactions. Companies that fail to comply with demat requirements could face restrictions on corporate actions like bonus issues or buybacks. The department is also seeking granular details, including directors’ profiles, board meeting minutes approving investments, bank statements to verify financial capacity, and links between NRIs and offshore entities, as per the report. "While investors are generally able to provide details relating to identity and valuation, establishing the source of funds continues to pose a challenge, particularly if it involves overseas pooling vehicles. The increasing emphasis by tax authorities on examining the 'source of source' is often impractical, given the large and diversified investor base of global funds. Sometimes, well-established institutional investors may be subjected to scrutiny, resulting in hardship, unwarranted tax additions, and litigation. The department should calibrate their queries based on the nature and category of overseas investors, rather than relying on a standardised line of questioning," said chartered accountant Ashish Karundia in the report. She is working as a Chief Copy Editor at Times Now’s Business Desk, where she covers key developments in the stock market, Indian corporates across se... View More