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Business News/ Politics / Policy/  Govt examining proposal to ban cash transactions over Rs3 lakh
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Govt examining proposal to ban cash transactions over Rs3 lakh

Ban on cash transactions over Rs3 lakh will help in curbing generation of black money, give another push to India's movement towards cashless economy

CBDT chairperson Rani Singh Nair said India is in talks with Singapore to renegotiate the tax treaty between the two countries. Photo: PTIPremium
CBDT chairperson Rani Singh Nair said India is in talks with Singapore to renegotiate the tax treaty between the two countries. Photo: PTI

New Delhi: The government is considering a recommendation of the Supreme Court-appointed special investigation team (SIT) on black money to ban cash transactions above 3 lakh.

If implemented, it will help in curbing the generation of black money and provide another push to India’s movement towards a cashless economy.

Speaking on the sidelines of an Assocham conference in New Delhi on Tuesday, Central Board of Direct Taxes chairperson Rani Singh Nair said, “These recommendations have come. It (banning cash transactions over 3 lakh) is under examination."

The SIT headed by former Supreme Court judge M.B. Shah had recommended a legislation to ban all cash transactions above 3 lakh as well as imposition of a 15 lakh limit on cash holdings to check cash transactions, and ensure a paper trail for every high-value transaction to prevent tax evasion.

High-value transactions in cash are a common feature, especially in the real estate and jewellery sectors.

“Since TCS (tax collected at source) has already come into effect, I don’t think banning cash transactions entirely is a good idea as cash is also a legal and valid tender. The PAN trail caused by TCS will have the necessary effect in acting as a deterrent to the utilization of black money," said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP. He was referring to the tax department’s recent steps to make TCS compulsory for certain transactions.

Nair also said that the government is in talks with the Singapore government to renegotiate the tax treaty between the two countries.

“They are under the same protocol as Mauritius. So, now that we have renegotiated with Mauritius, Singapore is under discussion," Nair said, without giving a time-frame for the conclusion of talks.

With the amended India-Mauritius treaty coming into effect from 1 April 2017, the government is aiming to bring the amended Singapore treaty into force from the same date to prevent any arbitrage.

The changes in the Singapore tax treaty are expected to be on the lines of the Mauritius treaty, including doing away with capital gains tax exemption.

However, there may be some minor differences between the two treaties.

GAAR and tax treaties

Also speaking at the seminar, Akhilesh Ranjan, chief commissioner of income tax (international tax), said the income tax department will not use the general anti-avoidance rules (GAAR) to scrutinize transactions made under tax treaties that already have inbuilt provisions to check tax avoidance.

This means treaties where there is a so-called limitation of benefit clause with a principal purpose test may not come under GAAR’s scrutiny.

This could provide some certainty to foreign investors looking to invest in India under various treaties.

A limitation of benefit clause generally limits the benefits of the treaties to those entities who meet specific criteria—like an annual expenditure of a certain amount in a year in the country of residence or employing a particular number of people or listing on the stock exchanges of the resident country.

A principal purpose test aims to do away with the treaty benefits for those transactions that are primarily designed to obtain treaty benefits.

“GAAR will override treaties only where there is no specific principal purpose test," said Ranjan. “However, where these anti-avoidance clauses are there, there is no need for invoking GAAR," he said, adding that the scope of GAAR is narrower than these provisions.

After being postponed twice, GAAR will come into effect in India from 1 April 2017.

This stringent anti-abuse provision has the industry worried as they fear greater scrutiny from the tax department.

GAAR will empower the tax department to invalidate transactions that have been undertaken to deliberately avoid paying tax.

The rules also give the tax department powers to override tax treaties in transactions specifically designed to avoid paying taxes in India. This would bring most of the so-called tax havens under GAAR’s scrutiny.

Ranjan said the tax department will also issue the final guidelines for place of effective management (POEM), another anti-avoidance measure announced in last year’s budget, but postponed by a year.

“There has been a delay. But it is because we are trying to be very specific and provide clarity on where all POEM will be applicable," he said. The earlier draft of the POEM guidelines was criticized by analysts and companies for being vague.

PTI contributed to this story.

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Published: 23 Aug 2016, 08:40 PM IST
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