Fintech firms engaged in instant short-term loans through mobile applications have come under the Income Tax Department scanner. The international taxation wing of the department has shot notices to as many as 40 fintechs seeking explanation over high payments to their foreign parent company and why it should not be treated as "business profit".
Over the past fortnight, notices were issued under Section 133 (6) of the Income Tax Act, questioning their nature of transaction, as money remitted to foreign parent were shown as fees paid for technical services, or FTS.
The tax department notice sought explanation as to why remittances to the foreign parent entities should not be treated as “business profit”, as nature of transaction does not appear to be fees paid for technical services.
Income Tax Department is examining whether the higher prices have been paid under the pretext of FTS to shift profit from India to parent country in order to reduce the claim of expenses to domestic arm. Experts say that treating it as FTS or royalty would change the overall tax liability for Indian companies.
NDTV Profit reviewed some of these notices issued.
Fintechs were asked to furnish their response physically or through their representatives by Dec. 30.
The tax department had sought details regarding the rate of interest received from customers, loan agreement with potential borrowers, and recovery methods employed, in both normal circumstances and defaults. Queries from the taxman also enquired whether the respective fintech firm is certified by Reserve Bank of India to extend microfinance loans.
Sources say that in case the department establishes profit shifting, then it will want to apply transfer pricing clauses to check if the payment has been made at arm's length price in respect of similar transactions with other companies.
In the notice, the department underlined that the transaction of licensing of services and rendering of management services were international transactions, and income arising from these has to be determined with regard to arm's length price.
If an Indian company has overpaid its foreign parent company, for instance, or has received income from the parent company that is lesser than what the rate should have been, transfer pricing rules will be applied in order to rectify the difference.
An “arm's length price test” will be run to check whether the transactions meet the requirements. If they don't, then the overpayment is nullified, or the under-payment is appropriately identified to ensure that the correct tax is collected in India.
The move comes amid the government measures on unregulated lending practices. The Centre, in collaboration with states, had recently proposed to classify unregulated lending as a cognizable and non-bailable offence, with penalties including imprisonment of up to 10 years.
The Finance Ministry has invited feedback by Feb. 13 from stakeholders on the draft Banning of Unregulated Lending Activities Bill, which aims to address both traditional and digital lending.
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