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Section 94A and Its Significance Against Black Money

Last Update Date : April 29, 2019
Estimated Read Time: 5 min

section 94a

In today’s world where everyone wants to earn lot of money, they go to many lengths to find out a way to save taxes. This non- co-operation with the Government in respect to tax related transactions has created the need for section 94A, which states income and investments in other countries must be declared. As Mahatma Gandhi once said,” Non-cooperation with evil is as much a duty as is co-operation with good”.  The government of India(GOI) has negotiated and made agreements with different countries to create financial transparency and to curb black money. This guide covers Section 94A and how it will have a significant impact in the country.

What is Section 94A?

Section 94A was introduced in Finance Act 2011 which empowered the Government of India(GOI) to notify any country that does not help India in exchange of Tax Information, which leads to rise in tax evasion.  It deals with all transactions by individuals in declared or located Notified Jurisdictional Area (NJA).
After, ITR forum A.Y. 2014-2015 it was clear that taxpayers must disclose any type of transactions that has been made by an individual with a person located in jurisdiction notified under Section 94A of the Income Tax Act.

Reason for Introduction of Section 94A

  • With the rise in flow of black, awareness has increased leading to various measures and steps being taken by GOI to control the generation and circulation of black money.
  • Different tax Information exchange agreements with various countries has been signed for full transparency of transactions including overseas transactions.
  • Some countries have not been co-operative in sharing transactions details mentioned u/s 94A.

Provisions of Section 94A

  • Section 94A empowers the govt. to notify the non-cooperative countries/islands that do not share tax Information as Notified Jurisdictional Area (NJA).
  • If an individual has any kind of transaction with a person living in Notified Jurisdictional Area then, all the parties that took part in the same transaction are thought to be of or associated to enterprises and transactions will be considered as International Transactions. And so, transfer pricing regulations should apply accordingly.
  • No deductions are allowed in any kind of transaction made to a financial institution unless that individual provides an authorization, authorizing Income Tax Authorities to seek relevant information from the same financial institution.
  • No deductions are allowed in any other kind of expenditure or allowances (including depreciation) coming from any individual living in NJA by Income Tax Authorities, unless the individual maintains such other documents and provides clear information regarding the same.
  • If any individual receives any amount from another individual living in NJA, then it is receiver ’s responsibility to disclose the source of income. If unsuccessful to do so, then it is assumed that it is the income of the individual receiving.
  • Any payments made to a person located in NJA under section 94A, shall be liable to pay higher tax rates than specified in the relevant provision of the act or rates in force or at a rate of 30%.

In this section, person located in NJA refers to —

  1.  “person located in a notified jurisdictional area” shall include, —
    1.  a person who is resident of the notified jurisdictional area;
    2.  a person, not being an individual, which is established in the notified jurisdictional area; or
    3.  a permanent establishment of a person not falling in sub-clause (a) or sub-clause (b), in the notified jurisdictional area;
  2.  “permanent establishment” shall have the same meaning as defined in clause (iii(a)) of section 92F;
  3. “transaction” shall have the same meaning as defined in clause (v) of section 92F.’.

Impact of Section 94A

As per section 94A of the Income Tax Act, the supposed tool box of countermeasures, which empowers the government of India to notify jurisdictions as NJAs. Consequently, in Nov 2013 Central Board of Direct (CBDT) notified Cyprus as NJA. This resulted in adverse tax consequences i.e., all transactions with any person in such NJA shall come under greater scrutiny and shall be subject to the following measures:

  1. All transactions with entities based in Cyprus shall be subject to transfer pricing regulations, including maintenance of documentation. This contrasts with the regular state of affairs, where such regulations are required to be followed only if the parties to any such transactions are “associated enterprises”, that is entities with share-holding in, or influence on another. Such additional requirements shall cause an increase in the cost of submission for companies choosing to do business through Cyprus.
  2. No tax deduction shall be allowed if the payment made by an Indian business is towards a financial institution in Cyprus, unless an authorisation for delivering of relevant information from the institution is furnished by the tax payer.
  3. No tax deduction for expenses incurred through transactions with person located in Cyprus unless the Indian tax payer provides information as required by the Indian tax authorities. This is in effect the Indian government stating that if Cyprus does not provide, we shall still get as much information as we can. Taxpayers will have no option but to comply or route their businesses through alternative jurisdictions.
  4. Any sums of money, including debt or equity inflow, will be considered income of the Indian tax payer unless details of the source of such money are provided to the Indian government. This could potentially lead to foreign investments being classified as income, and taxed as such, in the hands of the Indian company receiving investment unless adequate disclosures were made to the satisfaction of the tax authorities. This measure alone could very well control and reduce the use of Cyprus as an intermediate jurisdiction for investment into India.
  5. Lastly, any payment made to a person in Cyprus shall be liable for withholding tax the higher of a rate prescribed in Act or 30 per cent. Further, the Cyprus based entities will also have to file a return of income in India to claim such amounts as refunds making it arduous and administratively more difficult to engage in transactions with Cyprus.

Now, India has negotiated a revised Tax Treaty with Cyprus and removed it from NJA by issuing notice dated 16 Dec 2016.

Analysis of Section 94A

There is no doubt that introduction of this section has provided us a way to curb the generation and circulation of black money even oversees. But, a power given is only as good and wise as its user. There is a lot we can expect the government to do as till date only Cyprus has been declared as NJA, but there are lot of countries, islands where Indians have stashed their black money. Sooner or later our Government will have to deal with such countries and take appropriate steps.

Black money circulation must end and it will start from here. It is our duty to maintain transparency with our government rather than hiding and stealing money to save taxes. We at H&R Block provide tax planning, preparation and filing services to individuals, including non-resident Indians (NRIs) and expatriates. Use our Income Tax Calculator to figure out your tax amount for FY 2017 – 2018 by our expert advisors and certified professionals.

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CA Chetan Shinde
Chetan is the Lead Tax Advisor at H&R Block (India) with an experience of almost half a decade in audit and taxation. His professional areas of interest are GST advisory and statutory audit. Apart from taxation, he is passionate about social causes and works extensively towards rural school development and literacy.

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