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IT ruling on capital gains raises foreign investors' concern: report

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Foreign investors in unlisted Indian companies may have to pay higher capital gains taxes following a recent Mumbai Income Tax Appellate Tribunal (ITAT) ruling on two conflicting tax provisions that apply to non-resident entities. While Section 48 of the Income Tax Act allows taxpayers to calculate their capital gains after factoring in the acquisition cost, including exchange rate fluctuations, Section 112 does not. However, in the recent ruling on a plea by Dubai-based Legatum Ventures, the tribunal held that Section 112 would apply. Legatum Ventures sold shares of privately held Intellecap Advisory Services during the assessment year FY19, claiming a long-term capital loss of INR 3.6 crore in its tax filings based on the formula outlined in Section 48 of the Income Tax Act. However, the tax department disagreed with Legatum's assessment. Instead, based on Section 112, it determined that Legatum made INR 17.1 crore in long-term capital gains and demanded the fund make additional payments. ITAT ultimately sided with the tax department, establishing a precedent for future cases. If foreign funds cannot account for these fluctuations, their tax payments could increase substantially, even if their actual gains are negligible or negative. In the case of Legatum Ventures, for instance, this could lead to scenarios where offshore entities face dollar losses while being subjected to capital gains taxes in India. Until now, foreign entities filing their capital gains in India could choose between Section 48 and Section 112, depending on the more advantageous provision in a given case.