Income Tax red flag: Overseas remittances by shell-like entities under scanner

The Income Tax Department on Tuesday said it had undertaken verification of suspicious foreign remittances based on ground intelligence and analysis of data on outward remittances. The tax department’s verification exercise has raised concerns over overseas remittances made by entities that have reported little or no genuine business activity. The findings have prompted closer scrutiny of the underlying transactions and the documentation supporting such transfers.

Why are such remittances being scrutinised?

The exercise highlights the need for greater due diligence where entities remit funds abroad despite having limited business operations or inadequate evidence of corresponding commercial activity. Such transactions may warrant closer examination to establish the nature and purpose of the remittance, the identity of the beneficiary and the source of funds.

The scrutiny has also put the spotlight on professionals issuing certificates for foreign remittances, including certificates in Form 15CB/Form 146.

Professionals are expected to undertake appropriate due diligence before certifying a transaction. They should not rely solely on information or documents furnished by the client without carrying out reasonable verification.

What should due diligence cover?

The due-diligence process may include examining the nature and purpose of the remittance, the underlying agreement or invoice, the identity and tax status of the remitter and recipient, the source of funds, and the applicable provisions governing tax deduction or withholding on the payment.

Professionals should also assess whether the transaction is consistent with the client’s stated business activities and overall financial profile.

The verification exercise underscores the importance of maintaining adequate supporting documentation and exercising professional judgment while issuing certificates.

Where the facts or documents raise material concerns, professionals may need to seek additional information or clarification before proceeding. In cases where the relevant issues cannot be satisfactorily addressed, they may need to refrain from certifying the transaction.

What does this mean for cross-border payments?

The developments are expected to reinforce scrutiny of cross-border payments involving entities with limited commercial activity. They also place greater emphasis on the quality of due diligence undertaken by professionals before certifying foreign remittances.

For taxpayers, the exercise underlines the importance of ensuring that overseas payments have a clear commercial rationale and are supported by adequate documentation.