Madras High Court sustains provision against foreign tax havens

The Madras High Court on Tuesday paved the way for taxing investments from Cyprus as it upheld the central government's decision to classify Cyprus as noticed jurisdictional area.

Justice V Ramasubramanian and Justice T Mathivanan, in passing orders on a total of nine petitions, said there was nothing unconstitutional about Section 94A, and in fact it was "the need of the hour," reported The Times of India.

 According to Section 94-A (1) of the Income Tax Act, "if an assessee has received or credited any sum from any person located in a notified jurisdictional area and the assessee does not offer any explanation about the source of the said sum or the explanation offered by the assessee, in the opinion of the assessing officer, is not satisfactory, then such sum shall be deemed to be the income of the assessee for that previous year."

Since December 1994, India and Cyprus have entered into an agreement to avoid double taxation and fiscal evasion. The ruling is expected to result in the imposition of 30 percent deduction at source (TDS) on inflows from Cyprus, a known tax haven, said International Business Times.

The order would affect several foreign institutional investors (FIIs) and private equity investors who chose the Cyprus route to invest in India. It would be a major step towards controlling undisclosed money, said Pramod Kumar Chopda, standing counsel for the government. 

Section 94 (A) of the I-T Act was introduced by the Finance Act 2011. It empowered the government to notify any country that does not help India in tax information exchange as a "Notified Jurisdictional Area." According to Section 94-A (1), if an income tax assessee is unable to explain to the tax authorities of the source of the funds received or transferred to a notified jurisdictional area, the sum is deemed to be the income of the assessee for that previous year.

Cyprus, despite signing a double taxation avoidance agreement (DTAA) with India in 1994, had not been very cooperative in sharing tax-related information. This was why India also notified the country under Section 94A in 2013.

Stating that the 1994 agreement contained a specific provision for exchange of information about investments made by Cyprus-based companies in India and the source of investments, the judges said that a breach of that obligation had forced the Centre to declare Cyprus a notified jurisdictional area and demand tax from assesses transacting with individuals or companies in that country, reported The Hindu. 

In writing the decision, Mr. Justice Ramasubramanian said that defensive measures such as insertion of Section 94A were aimed at enforcing transparency in cross border remittances and preventing abuse of benefits conferred by treaties.

He noted G20 nation leaders adopted certain resolutions in the London summit on April 2, 2009 and issued a statement which reads: "We agree to take action against non-cooperative jurisdictions including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over."

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madras, madras high court, tax, dirty money, tax havens

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