Scope widened for tax treaty with Hong Kong

Written by fe Bureau | New Delhi | Updated: May 1 2010, 05:09am hrs
The government on Thursday notified Hong Kong Special Administrative Region (SAR) as specified territory under the Income Tax Act, 1961. This paves the way for signing a double taxation avoidance agreement (DTAA) with Chinas island nation and also exchange of information about tax evaders. Signing a DTAA would help the finance ministry to speedily resolve tax disputes such as in the case of the Vodafone-Essar deal. In fact, the Vodafone case only hastened the DTAA negotiations with Hong Kong. Over 1,500 Indian companies, including banks, also have their presence in Hong Kong and so clarity on the tax treatment would be important for them.

This DTAA will ensure that tax issues dont cloud investment flows into India by some of the biggest global companies that use Hong Kong as the nodal hub for their Asia-Pacific operations. The notification enables the Central Government to enter into a double taxation avoidance agreement with SAR of Hong Kong, the finance ministry said in a statement on Thursday.

A DTAA allows a company to plead that it should be taxed in only one of the signatory countries, in this case India or Hong Kong, an autonomous region under mainland China. But the absence of the treaty complicates matters. The revenue departments case against Vodafone, which bought out Hutchs stake in the Hutchison-Essar telecom venture in India, has, in fact, been boosted by the absence of the tax agreement.

The Finance Act 2009 enabled the Indian government to enter into a DTAA with any specified territory outside India. This was done by amending Section 90 of the I-T Act. India has a double-taxation pact and a CECA with Singapore, the other Asian centre where several MNCs are headquartered.