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Section 94A of Income Tax Act


Section 94A of Income Tax Act

Section 94A of the Income Tax Act empowers the Indian Government to issue a notification to any of the applicable countries that fail to provide assistance in relation to the issue of the mandatory exchange of tax-related information. Its areas of coverage include declared or located Notified Jurisdictional Area (NJA). The ITR Forum of A.Y. 2014-2015 has further clarified that all taxpayers in India are bound to disclose all transactions made with another person located in the stated jurisdictions, irrespective of whether or not the assessee is having a taxable income.

Salient Features of Section 94A

  • Section 94A falls under the umbrella of its anti-tax-avoidance measures, which are aimed at curbing the generation and circulation of black money. The Government had previously entered into different methods of Tax Information Exchange agreements with various countries so as to gather information pertaining to the money held by Indian Residents located outside India – a move entirely meant for ensuring the transparency of financial transactions.
  • Section 94A was introduced on the backdrop of non-cooperation of certain countries with respect to voluntary disclosure agreements. The income-tax regulation facilitates the Government to blacklist these foreign tax jurisdictions and penalize the Indian taxpayers and the concerned non-residents located in the non-compliant foreign locales.
  • The concept of the Tax Information Exchange Agreement (TIEA) should be considered before scrutinising this income-tax provision. TIEA is a legal instrument that entitles a country to receive information on civil or criminal investigations. A model TIEA has been framed by the OECD (Organization for Economic Co-operation and Development), the object of which is to foster international cooperation in issues concerned with tax and address harmful practices.
  • Individuals receiving any sum of money from another individual residing in an NJA are obligated to disclose the source of their income, failing which such income would be considered as the taxpayer’s own income and taxed accordingly.

Notified Jurisdictional Area

Section 94A allows the Indian Government to notify the non-cooperative countries or islands, i.e. those locales that abstain from sharing information, as Notified Jurisdictional Area (NJA). If a taxpayer from India pursues any transaction with a person located in the NJA, it will result in the following implications, which qualifies it for transfer pricing regulations:

  • The parties to the concerned transactions would be considered as associated enterprises
  • The concerned transactions would be categorized as international transactions

People located in NJA include the following:

  • A person who is a resident of the NJA.
  • A person, not being an individual, established in the NJA
  • A permanent establishment of any other person established in the NJA

Tax Deductions

No deductions under the Act is permitted for transactions made to a financial institution if the notified individuals do not authorize the Income Tax Authorities to seek relevant information from the transacted institution. Also, deductions are not allowed for any type of expenditure or allowances arising from an individual residing in an NJA, except if the concerned individual maintains the relevant documents and provides clear information. Payments made to a person located in an NJA would be liable for deduction of tax at the higher of the following:

  • Rates specified in the relevant provisions of the Act
  • Rates in force as per the latest Finance Act
  • At the rate of 30%