All about Section 94A of the Income Tax Act

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ITR Forms from AY 2014-15 onwards require the taxpayers to disclose whether any transaction has been made with a person located in jurisdiction notified under Section 94A of the Income Tax Act.

Section 94A was introduced by Finance Act 2011 which empowered the govt to notify any country which does not help India in Tax Information Exchange as a Notified Jurisdictional Area u/s 94A.

Currently, only the country Cyprus has been notified as a notified jurisdiction under Section 94A. Any transaction with any person located in Cyprus would attract the provisions of Section 94A.

Thus, if you have entered into any transaction with a person located in Cyprus, the answer to this question would be YES and if you haven’t entered into any transaction with any person located in Cyprus – the answer to this question would be NO.

The reasons for introduction of Section 94A, its provisions and the impact of dealing with a person located in a jurisdiction notified u/s 94A have been discussed hereunder.

Reason for introduction of Section 94A

Black money held by Indians in India as well as abroad has been a concern for many years and the Govt is trying its best to get bring back this money into the country.

The Indian Govt has been trying its best and using various anti-tax avoidance measures to curb the generation and circulation of black money. The govt has also entered into Tax Information Exchange Agreements with various countries for sharing for information with respect the money held by Indian Residents outside India.

However, there are some countries which have not been co-operative with respect to sharing of such information and India still does not have an effective tax information exchange system with such countries.

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

Section 94A empowers the Govt of India to black list certain foreign tax jurisdictions with which India does not have effective exchange of tax information system and thereby penalise both the taxpayer in India as well as the concerned non-resident located in such foreign jurisdiction.

Section-94A-Income-Tax

Provisions of Section 94A

  1. Section 94A gives the Govt, the power to notify any area with which the govt does not have effective system of tax information exchange as Notified Jurisdictional Area.
  2. If the assessee enters into a transaction with any person located in the Notified Jurisdictional Area, then all parties to the transaction shall be deemed to be associated enterprises and the transaction shall be deemed to be an international 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 institution unless the assessee furnishes an authorisation, in the prescribed form, authorising the Income Tax Authorities to seek relevant information from the said financial institution.
  4. No deduction in respect of any other expenditure or allowance (including depreciation) arising from the transaction with a person located in the notified jurisdictional area shall be allowed under the Income Tax Act, unless the assessee maintains such other documents and furnishes the information as may be prescribed.
  5. If any sum is received from a person located in a notified jurisdictional area, then the onus is on the assessee to satisfactorily explain the source of such money. In case of failure to do so, the amount shall be deemed to be the income of the assessee.
  6. Any payment made to a person located in a notified jurisdictional area specified under Section 94A, shall be liable to deduction of tax at the higher of the rates specified in the relevant provision of the act or rates in force or at a rate of 30%.

Meaning of Person location in Notified Jurisdictional Area – Section 94A(6)

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

  1. A person who is a 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 (a) or (b) above

Analysis of Section 94A

Section 94A is certainly an effective tool box to counter against tax avoidance and would help achieve a larger objective to curb the generation and circulation of black money. However, it would be interesting how effective and practical these provisions would be as till date only Cyprus has been announced as a notified jurisdictional area under Section 94A.

There are several other bigger countries as well wherein it is expected that a lot of Indians have deposited their black money. These bigger countries are not co-operating with India by sharing relevant information and it would be interesting to see how the Indian Govt deals with such countries.

A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.