What's illegal in owning a firm abroad, does lrs enable round tripping

1. What's illegal in owning a firm abroad?
Does LRS enable round-tripping?

2. Contd…
What's illegal in owning a company abroad?
The amount and purpose of remitting money abroad has historically been tightly
controlled by the RBI. Till 2004, all investments abroad required prior approval of
the central bank. Sending money overseas by resident Indians was made simpler in
2004 with the introduction of the Liberalised Remittance Scheme (LRS). Since then,
the amount of money that can be remitted without approval has been increased by
10 times -from $25,000 to $250,000.
Along with liberalisation, disclosure norms under other legislations have been
changed. For example: details of foreign assets have to be disclosed in the I-T
returns.
An amnesty scheme -the Black Money (Undisclosed foreign income and assets) and
Imposition of Tax Act, 2015 -had provided a three-month window which expired in
September last year, to declare undisclosed assets held abroad and pay taxes and
penalty on the value of assets declared. Under this scheme, 644 declarations were
made involving Rs. 4,164 crore.

3. Contd…
The Panama Papers disclose that certain Indian residents hold shares in firms
incorporated through Panama based firm Mossack Fonseca. TOI walks you through
key disclosure requirements relating to remittance of money and shows the
potential misuse of the LRS regulations.
What is LRS?
Under LRS, all resident individuals (including minors), are allowed to remit up to
$250,000 in a financial year for any permissible current account (such as for
medical treatment or education) or capital account transactions (such as buying
property overseas, or holding shares in an overseas company) or a combination of
both. No prior permission from the RBI is needed.
On June 1, 2015, the RBI reiterated that the permissible capital account
transactions include the following: opening of foreign currency account abroad
with a bank; purchase of property abroad; making investments abroad; setting up
wholly owned subsidiaries and joint ventures abroad; and extending loans to NRI
relatives.

4. Contd…
Another circular issued recently on January 1 this year also states the same.
However, remit ting money overseas to certain countries (such as Pakistan) or for
certain purposes is prohibited under For instance, buying LRS. For instance, buying
overseas lottery tickets or sweep stakes is not allowed, nor can one purchase
foreign currency convertible bonds (FCCBs) issued by Indian firms abroad.
Did grey areas exist about holding of shares in an overseas company or setting up
of a company abroad?
While holding of shares of an overseas company has been permitted since 2004, a
grey area prevailed for a few years on whether a resident Indian individual was
permitted to set up a company overseas -as opposed to acquiring shares in an
existing overseas company .
In an FAQ dated September 17, 2010, the RBI had said: “LRS did not permit
remittance by an individual for setting up a company overseas“. This FAQ did not
specifically prohibit investing in shares of existing overseas companies.

5. Contd…
Representations were made to the RBI and subsequent notifications cleared the
air.The RBI's notification dated March 5, 2013 but published on August 5, 2013
clarified that an overseas company can be set up by a resident Indian individual.
However, experts claim that for the period between 2010-2013 a grey area
continues on the legality of setting up of overseas companies by resident
individuals.
The 2013 notification has added that the joint venture or wholly owned subsidiary
to be acquired or set up by a resident individual shall be an operating entity only .
This overseas company could not in turn act as an investment company and acquire
another subsidiary or set up another subsidiary (In technical terms, there was a
prohibition on stepdown subsidiaries be it fully owned or by way of controlling
interest.
In other words, a company in a tax haven, be it Panama, or the British Virgin Island,
which has been set up under the LRS scheme by a resident individual, cannot invest
in another company , say a company in India.

6. Contd…
Does LRS enable roundtripping?
Round tripping involves getting money out of one country (say India) and sending it
to a tax haven only to be dressed up as foreign capital and sent back to India.
While LRS permits holding shares in an overseas company or even setting up a JV or
WOS overseas, it is clear that such an overseas company has to be an operating
entity engaged in business.
Such a company cannot have a step down subsidiary (as ex plained above). Thus,
round tripping isn't permissible.
However, experts point out that there are instances where the overseas company
in a tax haven (set up under the LRS route), buys shares in an Indian private
company at prices lower than fair market value (the shares are undervalued) and
subsequently on sale of such shares makes a killing. In other words, the overseas
company makes investments in an Indian company contrary to the LRS norms.

7. Contd…
For instance, if the over seas company is a Mauritius firm, the capital
gains arising on a subsequent sale of shares of the Indian investee
company is not taxable in India under the India-Mauritius tax treaty . If
a Panama Company has been incorporated, typically the shares in the
Indian company are held via an intermediary company in Mauritius, to
avoid tax on capital gains.
As the ownership in some offshore companies is opaque, such as in
Panama where bearer shares do not have the name of the shareholder,
keeping track of such roundtripping is difficult for Indian regulatory
authorities.
Have tax disclosure norms been strengthened?

8. Contd…
For the first time, in respect of the financial year 2011-12, resident
individuals had to file details of foreign assets in their income-tax returns,
which included: bank accounts held in foreign countries (details of the bank,
the account held and peak balance during the year); financial interest in a
foreign entity (including the investments made); overseas immovable
property , any other assets held outside India.
The disclosure details have been tightened with the income-tax returns for
the financial year 2014-15 calling for disclosures in foreign trusts (even if the
Indian resident taxpayer was a beneficiary or trustee).
Failure to furnish I-T returns or furnishing incorrect details entails significant
penalty of up to Rs 10 lakh and imprisonment of up to seven years.

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