Section 94A of Income Tax Act

Section 94A of the Income Tax Act empowers the Government of India to penalize tax payers in India or non-residents in a foreign jurisdiction if there is no proper exchange of tax information.

This section of the Income Tax Act was introduced in the Finance Act 2011 and entrusts power on the government to notify a country as a Notified Jurisdictional Area on the basis of non-fulfillment of provisions under Tax Information Exchange.

In the wake of increase in manifold of tax avoidance and black money held by Indians in “Tax Havens” abroad, the government is undertaking measures on multiple fronts to curb this menace. The story is quite well known on how Indians are using illegal means of stashing money abroad to avoid incidence of taxes on the income. One of the most prominent measures undertaken by the government in this regard is by entering into agreements such as Tax Information Exchange. It helps countries to share information on financial transactions by resident Indians in their respective jurisdiction.

This exchange system has not yielded the desired results since some countries are not fully co-operating with Indian agencies due to their own laws and bureaucratic hurdles. In order to avoid financial transactions with countries who are not fully co-operating in exchanging information, Section 94A was introduced by the Finance Act of 2011.

What is Section 94A?

This section empowers the government and its agencies to blacklist foreign tax jurisdictions where a proper system for exchange of tax information is not in place. It authorises them to penalize the taxpayer in India and the non-resident located in the other country in a foreign jurisdiction.

Section 94(A)(6) describes the meaning of a person located in the notified jurisdictional area as below:

  • A person residing in the Notified Jurisdictional Area
  • Persons with an establishment in the Notified Jurisdictional Area
  • A permanent establishment of a person in the Notified Jurisdictional Area not falling in any of the categories above

Provisions of Section 94A

  • As stated earlier, it entrusts the government with powers to notify a specific foreign area as Notified Jurisdictional Area where a proper Tax Information Exchange system is not in place.
  • If the resident Indian assessee makes a financial transaction with any person (as described in the section above) in the Notified Jurisdictional Area, such transaction(s) will be deemed as international transaction and accordingly, prevailing tax regulations shall be applied.
  • This section also disallows deductions in respect of payment made to a financial institution in the notified area. An exception to this condition can be sought if the assessee furnishes the required authorization in the prescribed format. Such authorization shall provide access to Income Tax Authorities to seek information from the financial institution in question.
  • Deduction on an allowance or expenditure arising out of the transaction cannot be made with a person located in the notified area. An exception to this rule is provision information as prescribed.
  • If a resident Indian receives money from a person located in the Notified Jurisdictional Area, the income tax assessee should provide details of the transaction and its source. If the assessee fails to provide the required information, it shall be subject to prevailing tax laws.
  • The tax for payment received from a person located in the Notified Jurisdictional Area shall be subject to a higher rate of 30%.

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