Black money: Narendra Modi’s government turns to Cyprus to act against round tripping
NEW DELHI: After reaching a significant breakthrough in information exchange on bank accounts with Switzerland, the Narendra Modi government has now turned the heat on European tax haven Cyprus as part of its fight against black money.
The government wants to drop a provision in the tax treaty between the two countries that exempts capital gains made in India by investors from Cyprus from tax. The island nation ranks seventh in terms of foreign direct investment (FDI) flows into India and is widely believed to be a conduit for round tripping of funds, experts said.
India, which has blacklisted the tax haven for not sharing information on bank accounts, will lift this restriction only if Cyprus agrees to scrap the capital gains exemption.
A team of officials from the external affairs ministry will travel to Cyprus this month. “The idea is to amend the tax treaty,” a government official told ET. FDI flows from Cyprus rose to $557 million in 2013-14 from $490 in 2012-13 despite India labeling the tax haven a non-cooperative jurisdiction last year. FDI through Cyprus amounted to $283 million in the April-August period this year. India is also concerned at the misuse of the tax benefit by investors from third countries that route their investments via Cyprus into the South Asian nation to take advantage of the tax exemption.
Investment routed through Cyprus can be taxed only in one country-Cyprus or India. Investors opt for Cyprus and escape levies altogether as there is no capital gains tax levied. In November last year, India suspended all treaty benefits and declared Cyprus a non-cooperative jurisdiction after the latter refused to share information on bank accounts held by Indians there.
This tag means a 30% withholding tax on all payments made to Cyprus and additional disclosure by Indian entities receiving funds from there, including revealing the source of funds. Indian entities that have investments from Cyprus also have to forego deductions of expenditure and allowances arising on account of transactions with any entity from that country.
Cyprus is the first jurisdiction to have been given the non-cooperative jurisdiction tag under penal provisions introduced in the Finance Act, 2011.
Although it has agreed to sharing information, India now wants Cyprus to agree to amend the 20-year-old treaty that offers tax benefits to residents in the European tax haven.
These are on the same lines as those available under tax treaties with Mauritius and Singapore, including exemption from tax on capital gains. Interest, royalties and fees for technical services also attract a lower rate of 10%.
Talks have been on with Cyprus for over a year but it has been resisting changes. The new government is looking to put in place a stringent framework to deal with black money and thus has piled up the pressure on Cyprus.