India suspends tax benefits pact with Cyprus

New Delhi: India today suspended a two decade-old pact with Cyprus that provided benefits to taxpayers conducting business between the two countries, saying the European nation has “not been providing” information to authorities here that are trying to track down black money.

“Cyprus has not been providing the information requested by the Indian tax authorities under the exchange of information provisions of the agreement, (hence) it has been decided to notify Cyprus as a notified jurisdictional area under section 94A of the Income-tax Act, 1961,” the finance ministry said in a statement.

The immediate fallout of this decision will be that an individual or a businessman who transacts between the two countries will not get beneficial tax deductions and will have to undergo stricter tax scrutiny.

“If an assessee enters into a transaction with a person in Cyprus, then all the parties to the transaction shall be treated as associated enterprises and the transaction shall be treated as an international transaction resulting in application of transfer-pricing regulations including maintenance of documentations,” said the statement.

It added that “any payment made to a person located in Cyprus shall be liable for withholding tax at 30 percent or a rate prescribed in Act, whichever is higher”.

The notification also means that “no deduction in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus shall be allowed unless the assessee maintains and furnishes the prescribed information”.

It also added that if “any sum is received from a person located in Cyprus, then the onus is on the assessee to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount shall be deemed to be the income of the assessee”.

India and Cyprus had entered into an agreement for avoidance of double taxation of income and prevention of fiscal evasion in December 1994.

In the Budget of 2011-12, the Finance ministry had inserted a clause - Section 94A - in the Income Tax Act to notify and guard against countries that do not cooperate in the exchange of information protocol.

The Central Board of Direct Taxes (CBDT) in June this year had notified rules under which an entity based in a “notified jurisdictional area” will have to give an undertaking to share information in a prescribed format.

Sources privy to the development said the decision was taken after enforcement wings of the ministry reported difficulty in eliciting information in a number of cases related to Cyprus during probes into money laundering and tax evasion cases.

India, as part of its efforts to counter the menace of black money and evasion of taxes, undertakes legal agreements like Double Taxation Avoidance Agreement (DTAA) and Tax Information Exchange Agreement (TIEA) with other countries.

PTI