Sebi Step may Prove Taxing for Jane Street
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US-headquartered proprietary trading firm Jane Street , barred by the Securities and Exchange Board of India (Sebi) over allegations of market manipulation, could also come under the income tax scanner. The department is considering a probe into potential violations of provisions related to the General Anti-Avoidance Rules (GAAR) framework and permanent establishment norms, people familiar with the matter said.According to Sebi's findings, Jane Street's Indian entity engaged in intraday trades in the cash segment, while its offshore entities, based in Singapore and Hong Kong, booked substantial profits through index option trades. This arrangement has raised concerns about the possible breach of certain tax provisions, said the people cited.These provisions pertain to the creation of permanent establishment, besides GAAR, according to the people. I-T department and Sebi officials have held informal discussions on the issue, they added.To be clear, the income tax department has not sent any formal communication or notice to Jane Street on the issue so far.Jane Street didn't respond to queries.'At this point in time, Sebi's interim order is being studied to look specifically for income tax violations,' said an official, adding that the closer examination of documents and accounts will take time. 'In the course of the examination, if any explanation is required from the entities, they would be communicated about the same.'Tax experts are of the view that Jane Street's structure may lack commercial substance, which means that GAAR provisions would apply. These allow the tax department to reattribute profits earned by overseas entities to Indian ones, subjecting them to taxation at rates up to 38.22%. This could have significant implications for Jane Street's tax liabilities in India.Jane Street's group structure involved four core entities, said Sandeep Sehgal, partner, tax, AKM Global, a tax and consulting firm. Two are Indian--JSI Investments and JSI2 Investments. The others are foreign portfolio investors (FPIs) based in Singapore and Hong Kong, he said.'The Indian entities were engaged in intraday trades on the cash and futures segments of Indian stock exchanges, while the offshore FPIs booked significant gains through index option trades,' he said. 'Notably, the profits were largely recorded in Singapore, benefiting from the India-Singapore tax treaty where derivatives gains are not taxable in Singapore… Jane Street's use of Indian entities to route intraday trades while booking large profits offshore, especially in Singapore, raises significant red flags under India's GAAR framework.'Under GAAR, any setup that lacks 'commercial substance' or exists mainly to evade taxes can be reversed by the tax department.
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