FIPB asks revenue dept to restrict FDI scrutiny

The Foreign Investment Promotion Board (FIPB) has advised the Department of Revenue to restrict its scrutiny of foreign investment proposals.

Official sources close to the development said that the Department of Revenue, under the Ministry of Finance, has started scrutinising all proposals even when it is not required or directed so. According to the FIPB rules, a proposal is vetted only by the original ministry and then any related ministry if it is recommended by the board.

However, of late, the revenue department has been examining all proposals, which are delaying fresh foreign investment proposals, otherwise known as foreign collaboration proposals. Some proposals are pending even for months together, officials have said.

Revenue officials are of the view that each proposal has to be examined to see if the proposal is genuine foreign investment or a mere transaction by an Indian company to roundtrip money, otherwise known as money laundering. This requires a thorough examination of source of funds, end use, credentials of the investors and business track record overseas, among others.

Moreover, such proposals, after getting approved are entitled for tax treatment either in accordance with the existing law in India or double taxation treaties. Thus, they also have a revenue angle. “If a foreign investment proposal gets approved and gets a favourable tax treatment according to a treaty but the investors are routing their money from foreign origin to into India through a fake project, it not only hampers foreign investment but hampers revenue as well,” said a tax official.

However, sources said if there is a delay beyond a stipulated time for clearing the proposal because of time taken by the Department of Revenue, even when their comments are not required, such proposals get cleared “in principle”.

Now, there has been a lot of delay in approval of foreign collaboration proposals for various reasons, one of them being a closer scrutiny of the Department of Revenue, sources said.

Officials have also added that if there are sensitive issues, the board itself directs ministries concerned to take a decision or even propose to cancel the approval, even when the project has got the approval.

Explaining the case, officials said due to security reasons, the proposals of foreign companies like ByCell and Telcordia were reviewed even when they had received the approval and started the operations.

However, close scrutiny even in cases when it is not required creates undue delay in granting approvals.