India has suspended the double tax treaty with Cyprus, which offered benefits to taxpayers conducting business between the two countries, saying that the country has broken its contract to provide information to India’s tax authorities.
As a part of the move, an individual who transacts between the two countries will not get beneficial tax deductions and will have to undergo stricter tax scrutiny.
India and Cyprus had signed a pact in 1994 under which both countries have a legal obligation to exchange such information.
As per the prohibition, if an individual enters into a transaction with an entity in Cyprus, the entity will be treated as an associate enterprise and the deal will be considered as an international transaction attracting transfer pricing regulations.
Also no reduction with respect to any other expenditure coming from a Cyprus transaction or a payment made to a financial institution shall be allowed unless the assessee provides the required documents.
According to the notification, any payment made to a person located in Cyprus shall be liable for withholding tax at 30% or a rate prescribed in Act, whichever is higher.
The notification added: "Any sum is received from a person located in Cyprus, then the onus is on the assessee to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount shall be deemed to be the income of the assessee".
"Cyprus has not been providing the information requested by the Indian tax authorities under the exchange of information provisions of the agreement, (hence) it has been decided to notify Cyprus as a notified jurisdictional area under section 94A of the Income-tax Act, 1961," the finance ministry said.