Fintech companies providing instant loans through mobile apps have come under the scanner of the Income Tax Department. The International Taxation Wing of the Income Tax Department has sent notices to about 40 fintech companies. In these notices, clarification has been sought on the huge payments made to their foreign parent companies. The department has also asked why these payments should not be counted as “business profits”.

Notice issued under section 133 (6)

The Income Tax Department issued notices under Section 133 (6) in the last fortnight. It raises questions over the nature of transactions in which money was sent to foreign parent companies as fees for “technical services” or FTS.

What is the investigation of Income Tax Department?

The department is trying to find out whether fintech companies have transferred profits to the parent country to understate the expenses of their domestic branches. If found so then it will be considered as “business profit”. Experts say that considering it as FTS or royalty may increase the tax liability of Indian companies.

Interest rate and recovery details sought

In the notice, the Income Tax Department has sought complete information about interest rates, loan agreements with borrowers, recovery process and methods of default. Along with this, it has also been asked whether fintech companies are certified by RBI for microfinance loans. Sources say that if the department proves that it was a profit transfer, then the transfer pricing clause will be invoked. This will ensure whether the transaction has taken place on the basis of ‘arms length price’ or not.

The purpose of this investigation is to ensure correct assessment of tax in India and bring transparency in financial transactions.