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Hema Ramakrishnan

NEW DELHI, March 10

THE Finance Ministry is set to adopt a carrot and stick policy on foreign companies operating here. Close on the heels of proposing a cut in the corporate tax rate on foreign companies from 48 per cent to 40 per cent, the Ministry has also firmed up a mechanism to crack the whip on those companies which are defaulting on tax payments here, but have assets abroad.

According to senior officials, the Ministry has decided to use the Double Taxation Avoidance Agreement (DTAA) route to ensure recovery of taxes from defaulting foreign companies that have assets outside India.

This will be done by incorporating a specific clause on "collection assistance'' in all the future DTAAs. "The objective is to seek the assistance of revenue authorities in jurisdictions (other than India) to recover taxes which the foreign companies are liable to pay here,'' said officials.

The existing income tax legislation empowers the assessing officer (AO) to attach any property belonging to the assessee to protect revenue interests in certain cases. Such provisional attachment is, however, possible only if the property is within India.

Tax recovery, however, is problematic in cases where the assessee (on whom the demand is raised) has property outside India. The incorporation of the collection assistance clause would enable revenue authorities in jurisdictions - where the assessee has property - to step in and ensure that the tax is recovered.

Some of the existing DTAAs already have a clause on exchange of information. A case in point is the recent DTAA with the Republic of Austria, which states that the competent authorities of the contracting States will exchange information to carry out the provisions of this convention.

Accordingly, any information received by a contracting State will be treated as secret in the same manner as information under the domestic laws of that State and shall be disclosed only to persons or authorities (including Courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution of, or the determination of appeals in relation to the taxes covered by the Conventions.

"Although the exchange of information clause takes care of the collection assistance to a certain extent, the Ministry has taken the view that a specific clause in the DTAAs on collection assistance would prove to be more effective,'' said an official.

Currently, only very few out of the 65 odd DTAAs have this clause. Officials said that amendments might be considered in those treaties that do not have this clause.

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