focus again. This time the Income Tax (I-T) Department has found that CAs
have given false certificates, enabling Non-Resident Indians (NRIs) and
foreign nationals to evade taxes in India.
The government agency has informed the Institute of Chartered Accountants of
India (ICAI), which regulates the chartered accounting profession in the
country, of the fraud. ICAI has powers to take disciplinary action against
errant members.
Calling the fraud "a massive violation of the law", Central Board of Direct
Taxes (CBDT) member Saroj Bala (in charge of revenue) said, "A large number
of such payments are outright tax deductible in India and taxable in India,
but are not taxed because CAs have certified them not taxable."
CBDT administers all direct tax issues in the country, but the tip-off on
this method of tax evasion came from a CA.
Under the Income Tax Act, a CA certificate can be obtained saying no tax
needs to be deducted while remitting money overseas, after which the Reserve
Bank of India permits the transfer of money.
Bala said the department receives numerous such certificates involving
"thousands of crore of rupees". A firm estimate of revenue loss is not yet
available as investigations are still on.
The payments that are under the I-T Department's scanner are interest on
overseas loans, payments for contractual work by foreign firms in India and
capital gains from sale of assets (similar to the Vodafone-Hutch
transaction). For instance, if an Indian firm borrows from a foreign bank,
under normal circumstances tax will have to be deducted on the subsequent
interest payment. But no tax is payable if a CA certifies that the overseas
entity that receives the interest payment is not a tax resident of India.
The I-T Department's investigations have found that the non-tax residency is
not necessarily the case. "Some verifications and inspections of
certificates have been carried out and many defaulters found. We are
contemplating action against this false certification by CAs," Bala said.
India tax rules also require tax to be deducted on payments from any income
earned by a company that has a permanent establishment (PE) in India.
Verification of many such CA certificates revealed that the foreign
recipients had PEs in India, but escaped the tax net.
Investigations found that both small and large accountancy firms are into
this practice. "Normally, many CAs do not apply their mind. They issue the
certificate and make money," she said, adding that when confronted, some CAs
claimed they were not aware of the tax provisions.