India acts tough on black money, may levy 30% withholding tax on Swiss investments

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Apr 26 2014, 06:47am hrs
BlackmoneyIndian firms like the Tata Group, Birla Group, Infosys, Wipro, Dr Reddy?s Laboratories, TCS and Glenmark have operations in Switzerland.
In a bid to get Switzerland to act on a long-pending demand for information on unaccounted money of Indians in Swiss banks, New Delhi is considering a 30% withholding tax on all kinds of payments made from India to individuals, incorporated entities and permanent establishments located in the European nation.

The move comes barely a fortnight after India agreed with the US to share information about American citizens and residents holding financial accounts in India in order to avoid all Indian financial institutions operating in the US being subjected to a similar 30% withholding tax when they bring back funds of their Indian clients.

India's plan to act tough with Switzerland would impact Swiss companies in India like Novartis and Roche and a large number of global companies operating in both countries. The payments their Indian arms make to their Swiss parents would not be recognised by India's Income Tax department as an expense while calculating their taxable income here. Also, all receipts from Swiss entities would be considered as income in India unless satisfactorily explained otherwise.

Indian firms like the Tata Group, Birla Group, Infosys, Wipro, Dr Reddys Laboratories, TCS and Glenmark have operations in Switzerland.

Finance minister Chidambaram told his Swiss counterpart Eveline Widmer Schlumpf last month that India's ongoing investigation into some cases of black money would get time-barred by the end of March and, in the event of continued denial of access to vital information under the Double Tax Avoidance Convention, India may be constrained to actively consider the options available under its domestic laws. Switzerland still denied access to information on Indians holding accounts in some Swiss banks.

Subjecting a huge withholding tax liability on outbound payments to another country is a tactic increasingly being deployed by major economies to elicit information on accounts held in that country by its citizens who do not report to the tax authorities at home.

SBI, ICICI and Bank of Baroda, which have operations in the US, would have come under the tax net if India had not agreed to share financial details of Americans with the Internal Revenue Service (IRS), said a government official. US had sought India's co-operation under its Foreign Account Tax Compliance Act (FATCA) that will come into force on July 1, 2014.

Under New Delhi's proposed intergovernmental deal with the US, Indian financial institutions will report details of accounts held with them by US residents and non-resident citizens to the Indian Income Tax department, which, in turn, will share them with the Internal Revenue Service (IRS).

However, there is a major difference between the American domestic law authorising such agreements with other nations and its Indian equivalenta provision introduced in the Income Tax Act of 2011.

Section 94 A is a special provision, which does not distinguish between financial transactions or other transactions such as trade- related payments. Theoretically, we can tax all outbound payments to a notified non-cooperating jurisdiction, explained a person privy to the development.

That includes payments for purchase or lease of tangible and intangible properties (trade receivables) as well as loans and interest payments.

Switzerland could be the second country to be notified as a tax non-cooperating jurisdiction by India after Cyprus.

Two-way trade between India and Switzerland is over $30 billion a year and the balance of trade remains heavily in favour of the European nation. Between April 2000 and December 2012, India has received foreign direct investment of $ 2.28 billion from Switzerland.