HC upholds stricter tax rule on inflow from abroad

Allows govt to impose 30% tax deduction at source on inflow from Cyprus

The high court here has agreed with the Indian government’s 2013 plan to tax investments from Cyprus, which was used by several foreign investors to avoid taxes in India. The order would impact several foreign institutional investors (FIIs) and private equity investors which invested in India via the Cyprus route.

This clears the way for the government’s decision to impose a 30 per cent tax deduction at source on inflow from Cyprus, a setback for foreign institutional investors. The notification was dated November 2013. Tuesday's court order was from a bench of judges V Ramasubramanian and T Mathivanan.

According to market sources, between 2000 and 2014, inflow via Cyprus into India and Indian stock markets was Rs  38,300 crore.

Pramod Kumar Chopda, standing counsel for the Union ministry of finance, Central Board of Direct Taxes and the I-T department, said the order would be a  major step towards controlling undisclosed money.

“Section 94A," said the judges, was "the need of the hour" and suffered no unconstitutionality. It allows the Centre, when there's lack of effective exchange of information with any place outside India, to specify the said country or territory as a notified jurisdictional area for transactions by any assessee.

India and Cyprus did sign an agreement for avoidance of double taxation of income and prevention of fiscal evasion, in force since December 1994. Both agreed to exchange information in this regard, particular for prevention of fraud or evasion of taxes, said the finance ministry in November 2013, when the notification was issued. However, Cyprus had not been providing the information requested under the Agreement. So, it was decided to make Cyprus a notified jurisdictional area.

Three individuals had challenged the section's constitutional validity and the November 2013 notification. There was an October 2014 agreement between an Indian company incorporated in Cyprus and these three individuals, on sales of shares and debentures. Three months after, the petitioners got tax showcause notices. The legal case followed.