H P Agrawal: Delete explanation to Section 90

Under the existing provisions of Section 90, where the central government has entered into an agreement with the government of any other country for granting relief of tax, or, as the case may be, avoidance of double-taxation, then, in relation to assessee to whom such pact applies, the provisions of the income tax shall apply to the extent they are more beneficial to that assessee.

It is clear that where there is a conflict between the provisions contained in the tax treaty and the provisions of the Income Tax Act, the foreign taxpayer can take advantage of that provision that is more beneficial to him.

Besides the above provision, the various tax treaties, which India has made with a large number of countries, invariably contain a provision of non-discrimination against foreign enterprises.

The non-discrimination clau-se contains provision to the effect that a foreign enterprise in India will not be subjected to any taxation, which is more burdensome than the taxation to which Indian firms are subjected to under the similar conditions.

In this context, reference may be made to the non-discrimination clause as contained in the UN model of tax treaties:-

"Nationals of a contracting state shall not be subjected in the other contracting state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nations of that other state in the same circumstances are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the contracting states".

Despite the above provisions, under the existing law, the explanation to Section 90 provides that where a foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India, it can be taxed at a higher rate than the rate at which a domestic company is charged, and such higher rate shall not be regarded as "less favourable charge" on the foreign firm.

The provisions of the explanation are apparently intended to penalise those foreign firms, which do not make prescribed arrangem-ent for declaration and payment of dividends in India.

The explanation to Section 90 appears to be against the non-discrimination clau-se contained virtually in all tax treaties signed by India.

Despite this the Finance (No.2) Bill 2004 proposes for a further amendment to the explanation to Section 90 to the effect that a higher rate of tax can be charged from a foreign company compared to the tax chargeable on the Indian company irrespective of the fact whether the foreign company makes prescribed arrangements for declaration or payment of dividend in India or not.

The proposed amendment to the explanation will only add fat to the fire without bringing in any advantage to Indian exchequer.

The amendment, which will apply with retrospective effect from the assessment year 1962-63 will have a far reaching implication on foreign companies in as much as the same will put a question mark on the fairness of Indian tax system, and India's commitment to the tax treaties that India has signed with other sovereign states.

It is therefore, urged that explanation to Section 90 should be deleted instead of being strengthened by the proposed amendment.

agar@nda.vsnl.net.in