Taxmen will now be able to keep a closer tab on income exempt under foreign tax treaties. The Central Board of Direct Taxes (CBDT) has said that any income arising in India but exempt from the countrys tax laws, because of a double tax avoidance treaty, must be first reported to the tax department before availing the exemption.
Even if the income is taxable outside India, the assessee must include it in the total income chargeable to tax in India, the board has said in a recent notification. Relief will be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement, the notification added.
With a large number of foreign companies operating in India, the department has found that there are many cases where either they are not reporting their exempt income or under reporting it.
While the assessee can avail the same foreign tax credit even now, the tax department will get a much better understanding of his earnings, a finance ministry official explained.
The departments missive, however, only relates to earnings of resident companies and individuals. Tax experts are of the view that with increased movement of workers and the cross border nexus between companies, the notification will help the department get a better understanding of the income of such assessees.
It looks like the departments intention is to get a complete picture of a persons global earnings regardless of the benefits under the tax treaties, Amitabh Singh partner Ernst and Young said. The clarification is the latest in the CBDTs efforts to plug loopholes in the countrys international tax laws given that a large number of MNCs have set up shops in India through back offices and subsidiaries and are availing benefits under tax treaties.