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.
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.
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 –
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 –
To understand Sec 94A of Income Tax Act better, it is often recommended to glance through its salient features.
These pointers help to gain valuable insight into Section 94A –
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.
These are among the most noteworthy provisions of Section 94A 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) –
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.
This clause gives the government and its agencies the authority to blacklist foreign tax jurisdictions that do not have a proper mechanism for exchanging tax information in place. It gives them the authority to penalise both the taxpayer in India and the non-resident in the other country in a foreign jurisdiction.
It was established as an anti-tax avoidance method.
Section 94A of the Income Tax Act authorises the Indian Government to issue a notification to any applicable country that fails to give assistance in connection to the issue of mandatory exchange of tax-related information. Its covering areas include declared or located Notified Jurisdictional Areas (NJA).
There is no NJA under the current system.
It was introduced in the year 2011.