Unpaid shares’ in Dubai, BVI companies may come back to haunt many Indians

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Mumbai: An old, handy practice popularised by tax havens and sold by leading European banks is coming back to haunt many Indian businessmen.

Hundreds of them may be in for a nasty surprise for ‘owning’ companies in Dubai and other jurisdictions like the British Virgin Islands (BVI) by subscribing to shares without paying for the stocks

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Under the Indian Companies Act, a person is allotted shares only after full payment. While UAE Free Trade Zone (FTZ) rules require a minimum share capital of 50,000 dirhams (about ₹11 lakh at the current exchange rate), the authorities do not insist on the payment of the subscription amount.

 

Many chartered accountants and consultants practising in the UAE don’t advise investors to chip in the amount using banking channels. However, the records of the UAE authorities show investment by  For incorporating and owning such companies all an investor needs to do is pay a few thousand dollars in fees to professional advisors and authorities in UAE. It is quick, cheap, and investors believe it’s all kosher. But many to their dismay are today realising that ignorance of the law, wrong advice, and a cavalier attitude towards ‘fancy’ financial structures can exact a heavy price. “This trend of being a shareholder without having subscribed to the share capital (and without complying with FEMA procedures) when detected, would lead to a lot of questioning both by the tax and exchange control regulators. A negative inference would be drawn of the arrangement which would be more difficult to disprove,” said Bijal Ajinkya, partner at the law firm Khaitan & Co. The Indian Income tax (I-T) department, which may have got a whiff of these deals – with the UAE sharing information on investments and assets of Indian passport-holders there – would immediately conclude that the shares in Dubai FTZ firms were either acquired through hawala fund transfers from India or out of undisclosed cash lying in UAE.  This is because there is no record of fund remittance (from India to UAE) through official banking channels against the allotment of shares in Dubai. The officers of the Enforcement Directorate (ED), who typically snoop around for evidence of forex violations by residents, may also assume that such firms were set up to carry out investments not allowed under the Reserve

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Bank of India liberalised remittance scheme (under which a resident can  Legal practices and systems in India and UAE are very different. Most residents who have formed such companies have done it without proper knowledge of the regulations. Probably, they were not adequately advised. It’s very important to correct and regularise these investments and refrain from incorporating such outfits without complying with FEMA procedures in future,” said senior chartered accountant Rashmin Sanghvi. Under the Foreign Exchange Management Act or FEMA, a resident Indian cannot invest abroad or own a foreign company without complying with the procedures under this law. The price for such a lapse (of incorporating a company without fund transfer) can be stiff for investors who fail to get the benefit of the doubt from regulators and authorities in India. The very transaction (owning shares without any payment proof) is against Foreign Exchange Management Act (FEMA) while the non-disclosure of the shareholding in the ‘Foreign Assets’ schedule of the Income Tax Returns is a violation of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 – a harsh law that permits the I-T department to apply it retrospectively, impose a penalty of ₹10 lakh a year and even initiate prosecution proceedings against offenders What has unnerved many is the possibility of the ED putting a question mark on all the earnings, businesses and trade payments in these Dubai companies.

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“India has received diverse information from the UAE. Right now, tax and enforcement authorities are in an investigative mode. They have issued notices to various entities asking for detailed information. Other than the penalties for non-disclosure under Black Money Act, it remains to be seen how they would determine the tax. Allegation .. Legitimising such tax haven companies would require undergoing the compounding procedure with the Reserve Bank of India (RBI). A few residents are believed to have already filed applications to begin the compounding process. But the compounding fee can be very high if the central bank insists on levying the amount on the basis of total business profits since the inception of the foreign company. For a genuine businessman, such run-ins with the authorities are a reminder that promises by tax havens, offshore banks and overseas service providers could mean unwittingly breaking laws in India. They are hoping that regulators would be lenient while scrutinising past mistakes.
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