Income tax on my online drop-shipping business (India)

Question

I am an Indian citizen and I run a semi-drop shipping business. The details are:

1. I deposited 10 lakh through cheque/cash into my Indian savings bank account (PAN not submitted during account opening; only form 60 was submitted). This money was borrowed from several relatives.
2. I then deposit this amount into a 'Foreign online account' using my bank's debit card (billed as purchase). All my business activities are carried out using this 'Foreign online account.'
3. In about a month, I make a profit in foreign currency of the equivalent of 2 lakh.
4. I then withdraw 10 lakh from this foreign account back to my Indian debit card (billed as merchant refund). The 2 lakh profit is NOT withdrawn.

In short, technically, it looks like a purchase of 10 lakh and a merchant refund of 10 lakh (every month). Hence I am not making any profits. The money just keeps jumping between the Indian and foreign account every month. Can I get slapped by an income tax notice? If yes, then how do I proceed?

EDIT: The 'Foreign online account' is 'Neteller' http://www.neteller.com/ .This account can be opened by anyone having a debit card.

Answer 1

Please consult a tax advisor.

You may be voilating the FEMA [Foreign Exchange Management Act] and can land into trouble.

Further what you are doing can land up into various other acts as illegal including AML.

Further if there is income generated by Indian citizen in India, he is still liable to pay tax, irrespective of whether you get the funds back into India.

Edit:
AML is Anti Money Laundering. Your transaction is sure to raise AML triggers as it looks like converting Black Money to White in round about way. Once the triggers are raised, RBI division will investigate further to verify what you are doing. If you are able to prove that this is a valid transaction, you would be OK on AML front.

How will Income Tax Know?
- If they don't know does not mean you are not liable for tax.
- Any suspicious transactions would get investigated and sooner or later Income Tax would know about it and can cause a serious problem.
- It is irrelevant where you have kept the money, if you have earned something, its taxable. For it not to be taxable you need to conduct this business differently.

Please consult a tax adviser who will advice you on the tax-ability of this type of transaction.