The income-tax department intends to bring individuals under the ambit of the proposed controlled-foreign companies (CFCs).
The rules on CFCs, proposed under the Direct Taxes Code, are aimed at ensuring that all companies and individuals pay tax on income arising from investments overseas.
Currently, the profits of foreign companies controlled by residents are taxed in India only when it is distributed in the form of dividends to the parent. Under CFC rules, if a company has not repatriated profits to India, its income would be deemed to have been distributed.
While provisions in the DTC Bill, which was introduced in Parliament last month, is silent on the applicability of the rules to individuals, tax department officials said that it would include individuals, companies, trusts and partnership firms. "It is not necessary that the CFC rules be triggered only when you are dealing with a resident company," said an official, who did not wish to be identified.
To ensure that it can implement the norms properly, the government has proposed in the Bill that individuals, companies, trusts and partnership firms provide details of their investments abroad once DTC is applicable from April 2012.
This is a departure from the present norms, as there are no such provisions under the existing Income-Tax Act, resulting in cases of money laundering, a revenue department official said.
The new law will give tax authorities more teeth to help prove an economic offence and trace money held abroad.
The 20th Schedule of DTC, which deals with computation of income attributable to a CFC, says "a resident assessee shall furnish the details of its investment and interest in any entity outside India in such form and manner as may be prescribed".
Currently, tax officials have to rely on information available with Sebi and RBI for investments made by Indian companies abroad.
But for individuals and unorganised sector workers, there is no legal requirement to furnish details of assets held abroad.
For instance, if an individual has a bank account in the UK, he is not bound by law to declare it to the tax department in India. However, the income accrued from this account has to be declared for tax purposes.
The catch here is that many residents do not repatriate money to India and invest the money in trusts abroad, which results in tax avoidance and even evasion.
"Getting information on foreign assets of small companies, trusts and especially individuals is a problem. Many people open trusts in tax havens to launder money," said a finance ministry official.
"If CFC provisions, as proposed in DTC 2010 are introduced, companies as well as individuals may be required to furnish these details in the respective returns to be filed and therefore come under direct scrutiny by authorities without need to seek information from RBI," said Sandeep Chufla, tax partner at consulting firm Ernst & Young.
For companies, the introduction of CFC will be a double blow. A company in a foreign location controlled by Indian residents may be taxed in India, even if it is set up in a high-tax jurisdiction, said an official.
DTC defines a territory with a lower rate of taxation as a country outside India in which the amount of tax paid by a company is less than half the tax payable in India.
For instance, if corporate tax in India is 30 per cent, a company set up in a country which has over 15 per cent tax is not required to pay any tax in India. However, if that country offers any tax concessions and the actual amount paid falls below 15 per cent, CFC rules will be triggered and tax will have to be paid in India.
The corporate tax rate in Singapore is 17 per cent, but the burden can come down by 7 per cent provided it fulfils certain conditions.
Similarly, the tax rate is reduced to 12.5 per cent from 25 per cent in Ireland, from 30 per cent to 5-7 per cent in Switzerland, and from 25 per cent to 10 per cent in the Netherlands.
