Jane Street faces I-T notice over ₹20,000cr derivatives gains
What's the story
The Income Tax Department has issued a draft notice to high-frequency trader (HFT) Jane Street. According to Moneycontrol, the department seeks an explanation as to why Singapore treaty benefits should not be denied for derivative market gains worth ₹20,000 crore. The gains were made by Jane Street Singapore over the last four to five years. The notice comes amid an ongoing SEBI impounding order for alleged market manipulation by the company.
Accusations
Jane Street could be liable for ₹7,000 crore payment
The tax department has accused Jane Street of moving its base from Hong Kong to Singapore after FY20, solely to avail tax exemptions offered by the latter. It also claimed that the Singapore office of the company lacks commercial substance. If these treaty benefits are denied, Jane Street could be liable for a payment of around ₹7,000 crore.
Defense strategy
Jane Street's defense hinges on COVID-19 lockdown narrative
In its defense, Jane Street has said it moved to Singapore due to force majeure during the COVID-19 lockdown. The company claims that traders were finding it difficult to operate from Hong Kong and requested an alternative until lockdowns were lifted. If the tax department's interpretation holds true, many other traders could be affected as some have set up similar structures.
Expert opinion
Tax treatment difference between Singapore and Hong Kong
Tax experts have noted a stark difference in the tax treatment of entities from Singapore and Hong Kong under the India-Singapore double tax avoidance agreement (DTAA). The treaty gives exclusive taxing rights to the resident state, resulting in a zero-tax outcome for derivative profits. However, under the Hong Kong treaty, India retains its right to tax such gains under domestic law.
Broader impact
Expert warns of far-reaching implications if revenue department prevails
Binoy Parikh, a partner at Katalyst Advisors, said if the revenue proves that Jane Street's Singapore entity lacked genuine substance and trading decisions were directed from Hong Kong, the treaty benefit would be completely denied. This could have far-reaching implications as many global funds use Hong Kong as their Asian trading hub while booking India-facing transactions through Singapore-registered FPIs.