India looks to encourage tax information exchange

By added on 04/03/2011

In a move to stop the illicit outflow of money from India, the country's finance minister has proposed a 'toolbox of counter measures' to discourage Indians from dealing with jurisdictions that hesitate or refuse to enter into tax information exchange agreements (TIEAs), The Telegraph reports.

Minister of Finance Pranab Mukherjee has included in proposals for this year's budget a minimum 30 per cent tax deduction at source (TDS) on transactions with entities in "non-cooperative" jurisdictions that do not effectively exchange information with India.

As the country is an emerging BRIC economy with a growing voice in global finance, the move may set a precedent for countries looking to improve financial transparency and clamp down on the loss of revenue through offshore tax arrangements.

India has so far signed TIEAs with Bermuda, the Isle of Man, British Virgin Islands and the Bahamas. Last year the Washington-based research and advocacy group Global Financial Integrity estimated that India lost nearly £100 billion through illicit outflows.

Of the 22 identified non-cooperative jurisdictions, negotiations with 11 are now complete according to Gujurat Zone's chief commissioner of customs Lipika Majumdar Roy Choudhary.

A spokesman for Guernsey Finance said: "The island is building a close relationship with India and a delegation from Guernsey visited and met with various authorities there last October. We are making good progress towards signing a TIEA with India at the earliest opportunity.”

Addressing parliament and speaking of the dangers of "black money", Mr Mukherjee said: “We secured Membership of the Financial Action Task Force (FATF) in June last year. This is an important initiative of G-20 for anti-money laundering.

"We have also joined the Task Force on Financial Integrity and Economic Development, Eurasian Group (EAG) and Global Forum on Transparency and Exchange of Information for Tax Purposes".

Mr Mukherjee also proposed that transactions with non-cooperative jurisdictions be deemed international transactions and therefore attract transfer pricing regulations.

Payments would only then benefit from tax deductions providing whoever made the payment gives the Indian tax authorities permission to seek relevant information about the financial institution into which the money is paid.

Moreover, if a resident were to receive money from such jurisdiction, then the onus would now be on the assessee to explain “satisfactorily” the source of such money. Otherwise, the amount would be deemed as income of the assessee.

In a bid to attract foreign funds for financing of infrastructure, Mukherjee proposed the creation of special vehicles in the form of notified infrastructure debt funds and to subject interest payments on the borrowing of these funds to a reduced witholding tax rate of five per cent instead of the current 20 per cent rate. Income from these funds would also be exempt from tax.

India was ranked 87th out of 178 countries on last year's Transparency International's Corruption Perceptions Index.