1 TAX UPDATES
1. Black money hunt begins
The government has made the first move to track down individuals and entities that have slashed away black money in offshore banks. The Central Board of Direct Taxes (CBDT) has sent notices to at least 50 Indians who have accounts with LGT Bank in Liechtenstein, a tax haven bordering Germany. Tax authorities have sought information on the source of the money lying in the overseas bank and whether the account holders have paid tax on the amounts.
The list, provided by the German government, reportedly contains the names of some of India’s most prominent businessmen and industrialists. But the Indian government is under obligation against making the names public as they were provided under the Indo-German Double Taxation Avoidance Agreement (DTAA). The information exchanged under DTAA is confidential but the government is free to act on the information.
In the run-up to the polls, the Congress has repeatedly come under attack from BJP for not doing enough to bring back the black money parked by several Indians in offshore destinations around the world. International media reports estimate, wealth stashed away by Indians could a whopping $1-1.5 trillion.
Indian tax laws have provisions to prosecute a tax offender who refuses to pay even after a crystallised demand. If a person who holds accounts abroad is served a demand notice but declines to pay, (s)he could be invariably prosecuted under I-T laws. Legal experts say prosecution is an ideal tool to bring back unaccounted wealth held by citizens offshore. Senior advocate Mahesh Jethmalani says the prospect of prosecution could be most effective way of recovering such money.
2. Cross-border transactions of trusts taxable
In a verdict that will have a bearing on tax exemptions given to Indian trusts, especially education trusts, the Authority for Advance Ruling (AAR) has held that tax is to be paid in India on all cross-border transactions, even if the parties involved in the transactions are exempt from taxation in their respective countries. In May 29, 2009-order of the AAR was on an application filed by the Chennai-based Sri Ramchandra Education & Health Trust, which has an agreement for obtaining services from Harvard Medical International, which is also exempt from taxation under the US tax laws.
In this application, Sri Ramchandra Education & Health Trust sought to clarify whether tax has to be deducted from the annual fee payable to the Harvard Medical International. The trust claimed before the AAR that since both parties are exempt from taxation in their respective countries, the annual fee payable to the US party is exempt from taxes in India and hence no TDS be deducted from the payment to Harvard Medical International. The I-T department claimed that though Sri Ramchandra Education & Health Trust is exempt from the Indian I-T Act, the US-based Harvard Medical International is not exempt from taxation in India. Further, the I-T department said Trust may be exempt under section 12AA of the I-T Act, which exempts tax on teaching/education activities, but the “annual alliance development and administration/maintenance fees” that the trust has agreed to pay to Harvard Medical International do not come under the classification of payment for teaching or educational purposes.
The AAR held that it is not possible to conclude tax is not payable in India on the payment made to Harvard Medical International merely on the ground that both are exempt from taxation in their respective countries. The AAR stated that various transactions that took place between the parties should be scrutinised thoroughly before determining what proportion of the payment is liable to be taxed in India.