CA certificates under I-T Dept scanner

After the Satyam scam, the role of chartered accountants (CAs) has come into 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.