Section 94A Of The Income Tax Act

Section 94A of the tax Act empowers the govt. of India to penalize taxpayers in India or non-residents in an exceedingly foreign jurisdiction if there’s no proper exchange of tax information.

This section of the taxation Act was introduced within the Finance Act 2011 and entrusts power to the govt to notify a rustic as a Notified Jurisdictional Area on the premise of non-fulfilment of provisions under Tax Information Exchange.

In the wake of an increase in manifold minimization and black money held by Indians in “Tax Havens” abroad, the govt. is undertaking measures on multiple fronts to curb this menace. The story is sort of well-known on how Indians are using illegal means of stashing money abroad to avoid the incidence of taxes on the income. one of the foremost prominent measures undertaken by the govt during this regard is by getting into agreements like the Tax Information Exchange. It enables nations to share information about financial transactions involving Indian residents in their jurisdictions.

This exchange system has not yielded the required results since some countries aren’t fully cooperating with Indian agencies thanks to their laws and bureaucratic hurdles. to avoid financial transactions with countries that don’t seem to be fully cooperating in exchanging information, Section 94A was introduced by the Finance Act of 2011.

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What Is Section 94A?

This section empowers the govt and its agencies to blacklist foreign tax jurisdictions where a correct system for the exchange of tax information isn’t in situ. It authorizes them to penalize the taxpayer in India and also the non-resident located within the other country during a foreign jurisdiction.

Section 94(A)(6) describes the meaning of someone located within the notified jurisdictional area as below:

  • A person residing within the Notified Jurisdictional Area
  • Persons with an institution within the Notified Jurisdictional Area
  • A permanent establishment of someone within the Notified Jurisdictional Area not falling in any of the categories above

Reason For Introduction Of Section 94A

Black money held by Indians in India also as abroad has been a priority for several years and therefore the Govt is trying its best to induce bring back this money into the country.

The Indian government has been attempting to combat the formation and circulation of black money by using different anti-tax evasion measures. the govt. has also entered into Tax Information Exchange Agreements with various countries for sharing information about the money held by Indian Residents outside India.

However, some countries haven’t been cooperative with the relevant sharing of such information and India still doesn’t have a good tax information exchange system with such countries.

To discourage transactions with such countries which don’t have an efficient tax information exchange system with India, Section 94A also spoken as “Tool Box of Counter Measure” was introduced by the Finance Act 2011.

Section 94A empowers the govt. of India to blacklist certain foreign tax jurisdictions with which India doesn’t have an effective exchange of tax data system and thereby penalize both the taxpayer in India furthermore because the concerned non-resident located in such foreign jurisdiction.

Provisions Of Section 94A

  1. Section 94A gives the government, the ability to notify any area in which the government doesn’t have an effective system of tax information exchange as Notified Jurisdictional Area.
  2. If the assesses enters into a transaction with a person located within the Notified Jurisdictional Area, then all parties to the transaction shall be deemed to be associated enterprises and therefore the transaction shall be deemed to be a global transaction, and accordingly, transfer pricing regulations should apply to such transactions.
  3. No deductions shall be allowed in respect of any payment made to any financial organization unless the assesses furnishes an authorization, within the prescribed form, authorizing the tax Authorities to hunt relevant information from the said financial organization.
  4. No deduction in respect of the other expenditure or allowance (including depreciation) arising from the transaction with someone located within the notified jurisdictional area shall be allowed under the Tax Act unless the assesses maintains such other documents and furnishes the data as could also be prescribed.
  5. If any sum is received from an individual located during a notified jurisdictional area, then the onus is on the assesses to satisfactorily explain the source of such money. just in case of failure to try and do so, the quantity shall be deemed to be the income of the assesses.
  6. Any payment made to someone located during a notified jurisdictional area specified under Section 94A, shall be at risk of deduction of tax at the upper of the rates per the relevant provision of the act or rates operative or a rate of 30%.

Meaning Of Person Location In Notified Jurisdictional Area – Section 94A(6)

As per provisions of Section 94A(6) of the taxation Act, a person located in notified jurisdictional area shall mean:-

  1. A person who could be a resident of the Notified Jurisdictional Area
  2. A person, not being a private, which is established within the Notified Jurisdictional Area, or
  3. A permanent establishment of an individual not falling in (a) or (b) above

Analysis Of Section 94A

Section 94A Of The Income Tax Act

Section 94A is certainly a good toolbox to counter minimization and would help achieve a bigger objective to curb the generation and circulation of black money. However, it might be interesting how effective and practical these provisions would be as to date only Cyprus has been announced as a notified jurisdictional area under Section 94A.

There are several other bigger countries yet wherein it’s expected that plenty of Indians has deposited their black money. These bigger countries don’t seem to be cooperating with India by sharing relevant information and it’d be interesting to work out how the Indian Govt deals with such countries.