The tax authorities has begun to send letters to wealthy Indians who are betting on "blank cheque" organizations, which is Wall Street jargon for special purpose acquisition companies, or SPACs. In the previous ten days, the Income Tax (I-T) department has given notifications to at least four individuals based on a plethora of information supplied by Bermuda, which, like the Cayman Islands, is a favorite destination for forming SPACs.
SPACs are created purely for the purpose of raising money through pre-listing offerings, whereby investors are invited to participate in an already-existing, usually unlisted, operational business in exchange for a share. Eventually, the target business may combine with the publicly traded SPAC and list as an entity on major exchanges such as the New York Stock Exchange. SPACs gained popularity in 2019–20, and many Indian HNIs looking for fresh investment opportunities were drawn to them.
LRS Rules Provide More Defintion
However, a large number of Indian resident investors who purchased SPAC shares or units failed to disclose their foreign investments on the I-T return's FA (foreign assets) schedule. There is a transgression here. SPACs only acquire a firm or merge after raising capital and become listed, therefore it's likely that they decided not to declare since it was unclear if the Liberalized Remittance Scheme (LRS) could be used to purchase a stake in a corporation that had no legitimate business at the time of investing. The government now has information on jurisdictions that share details, such as Bermuda, according to Rajesh Shah, a partner at the CA company Jayantilal Thakkar.
The Reserve Bank of India (RBI) oversees the LRS, which allows a resident individual to remit up to $250,000 annually for a variety of purposes, including opening foreign bank accounts, purchasing stocks, and purchasing real estate. Bermuda is bound by the common reporting standard, which is an international framework that facilitates the automated exchange of data between nations.
Tax havens like Cayman and Bermuda are frequently used as hubs for the pooling of funds by loosely regulated or uncontrolled entities like SPAC. There has been a clear ban on investing in unlisted businesses like SPACs since August 2022, when new guidelines were added to the LRS regs. Even before the rules were tightened, many tax and foreign currency law practitioners feel that investing in SPACs through LRS was best avoided.
"The key condition for investments under the overseas direct investment route is to ensure that the entity abroad is engaged in a bona fide business," stated Moin Ladha, senior partner at the legal firm Khaitan & Co. Individual resident investors are not granted the ability to invest through a special purpose vehicle, however corporate companies can. This was the situation before to August of 2022.
