Section 94A of Income Tax Act

Section 94A of Income Tax Act, 1961 was included in the Finance Act (2011). It entrusts the power to penalise taxpaying entities when the exchange of tax information is not satisfactory. Several provisions accompany this Section of ITA to regulate the surge in tax avoidance and the act of stashing black money in foreign countries. As a taxpaying entity, it is essential to become aware of such provisions and the implications of avoiding them. 

What is Section 94A?

Fundamentally, this section serves as a tax information system that allows countries to exchange details of financial transactions made by Indian residents under foreign jurisdiction. 

Typically, Section 94A of Income Tax Act permits the government of India to issue a notice to any taxpayer residing in India or a foreign country. However, such a notice is issued when the taxpayer fails to assist matters related to the issuance of mandatory tax-related information. 

In other words, it was introduced to avoid fiscal transactions with those countries that are reluctant in divulging information or are hesitant to co-operate in general. To achieve it, this section empowers the authoritative bodies to blacklist those foreign tax jurisdictions with an improper system of exchanging tax information.

It was introduced mainly because of the non-cooperation of some countries with regard to voluntary disclosure of tax agreements. 

Notifications to Jurisdictional Areas

As per the norms of Section 94A of Income Tax Act, the government of India has the authority to notify countries or islands that refrain from sharing valuable tax-related information as Notified Jurisdictional Area.

In case a taxpaying individual from India indulges in any transaction that involves an individual residing in a Notified Jurisdiction Area, any of these implications may manifest –

• Parties involved in such a transaction will be regarded as associated enterprises.
• Qualifying transactions will be categorised as international transactions.

Notably, such implications qualify for transfer pricing regulations. Nonetheless, one must note that Sec 94A (6) describes a ‘person’ in a Notified Jurisdictional Area as –

• An individual residing in a Notified Jurisdictional Area.
• Any permanent establishments of an individual in a given Notified Jurisdictional Area.
• Individuals with an establishment in the Notified Jurisdictional Area.

To understand Sec 94A of Income Tax Act better, it is often recommended to glance through its salient features.

Salient Features of 94A

These pointers help to gain valuable insight into Section 94A –

• Since this section comes under the purview of anti-tax avoidance measures, it aims to regulate the circulation of black money.
• It is designed to ensure more transparency in financial transactions.
• As per this tax provision, the government and its agencies can blacklist any non-cooperating foreign countries. They can also penalise resident taxpayers and non-residents who are located in non-compliant foreign jurisdictions. 
• Tax Information Exchange Agreement has to be considered before one proceeds to scrutinise this particular income tax provision. The tax information exchange agreement serves as a legal tool that aids a country access information on criminal or civil investigations. 
• Individuals who receive money from another entity residing in a notified jurisdiction area are liable to disclose their income sources under this tax provision. In case the individual fails to provide details about such income, the same will be considered as his/her earnings and will be taxed accordingly.

Several provisions come under Section 94A. Having an idea about them will help taxpayers to account for their earnings and financial transactions with individuals based in foreign countries in a more streamlined manner. 

Provisions of Section 94A

These are among the most noteworthy provisions of Section 94A Income Tax Act –

• It allows the government to notify a foreign locale as NJA, lacking a proper tax information exchange system.
• In case a residing Indian assessee carries out a transaction with a ‘person’ mentioned under Sec 94A in NJA, the said transactions will be considered international transactions and attract tax norms accordingly.
• One must note that this section does not allow any deductions on payments made to financial institutions located in a notified area. However, one may seek an exception to this condition only if the assessee provides the required authorisation in an accurate format. Generally, such authorisation allows IT Authorities access to information from any concerned financial institution. 
• In case a residing Indian receives money from an individual based in a Notified Jurisdictional Area, the concerned tax assessee should share transactional information, including its sources. Failing to provide sufficient information will attract designated tax norms.
• Usually, the taxes levied on payments received from an individual situated in NJA are subject to a high rate of 30%.

Deductions Under Sec 94 of Income Tax Act

Generally, payments made to individuals based in a Notified Jurisdictional Area is liable for tax deduction at the rate of any of these following (whichever is higher) –

• 30%
• Rates mentioned in the Finance Act.
• Rates mentioned in the relevant provision of the IT Act.

There is no such provision as Section 94A TDS under this Act in regards to transactions with financial institutions, in case a notified entity does not authorise the IT authorities to access transactional information.

Additionally, no deduction is permitted to allowances or expenses of an individual located in a Notified Jurisdictional Area. 

To avail of the above-mentioned deductions, the concerned individual needs to maintain relevant documents that offer clear and accurate information.

Over the years, Section 94A of Income Tax Act failed to yield effective outcomes mostly due to non-cooperation and bureaucratic hurdles. Nevertheless, individuals involved in financial transactions with those based in foreign countries should check out this section’s provisions in detail.