Taxman’s arm may reach HK, Cayman Isles

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New Delhi: Budget 2009-10 has written in an innocuous clause authorising the government to enter into double-taxation avoidance agreements (DTAAs) with non-sovereign territories such as Hong Kong, Taiwan and the Cayman Islands.

While India has been planning to sign agreements with such non-sovereign territories for some time now, the Income-Tax Act, 1961, permits the finance ministry to negotiate taxation treaties with only sovereign countries.

The Indian revenue department woke up to the need for a tax treaty with Hong Kong last year following a tax dispute over the Vodafone-Essar deal. The department claims the merger created a capital gains tax liability of $1.7 billion (Rs 7,990 crore) in India, but Vodafone challenged its legal basis in the Supreme Court. The company said the deal fell under the jurisdictions of Hong Kong and the Cayman Islands, with whom India had no tax agreements.

The proposed amendment is, therefore, significant as some of the largest global companies use Hong Kong as the hub for their Asia-Pacific operations. Over 1,500 Indian companies, including banks, also have a presence in the Chinese autonomous territory.

The Finance Bill, 2009-10, tabled by finance minister Pranab Mukherjee in Parliament on Monday, proposes to amend Section 90 of the Income-Tax Act, along with corresponding provisions under Section 44A of the Wealth Tax Act, to enable the government to notify such specified territories outside India. Section 90 of the I-T Act empowers the Centre to enter into DTAAs with other countries.

“The government now wishes to expand the scope of this cooperation by entering into a DTAA or TIEA (Tax Information Exchange Agreement) with non-sovereign jurisdictions,” the Bill explains. The provision will come into effect from October 1, 2009.

“Under current provisions, India can only enter into a DTAA with sovereign states. With the amendments, such treaties can be signed with non-sovereign territories like Taiwan and Hong Kong,” pointed out BMR Advisors partner Mukesh Butani. Such treaties will come in handy for the revenue department when Indian firms ink cross-border deals.

But the plan could encounter diplomatic hurdles. Though India is keen to enter into a DTAA with Taiwan, New Delhi acknowledges the territory as a province of China, so no such agreement was possible so far. In Budget 2007-08, former finance minister P Chidambaram had introduced Section 90A so that specific associations in two countries could enter into an agreement on taxation, with the approval of their respective governments.