Direct Tax

Report No. 18 of 2010 - Performance Audit of Taxation of Payments to non residents

Date on which Report Tabled:
Fri 10 Dec, 2010
Date of sending the report to Government
Government Type
Union Department
Direct Tax
Sector Taxes and Duties


Growing integration within the global economy has led to increased flow of capital, services and technology into the country. As an impetus to economic growth, the government has eased the restrictions on flow of foreign exchange transactions. The Foreign Exchange Regulation Act [FERA] was repealed and replaced by the Foreign Exchange Management Act [FEMA] in June 2000 with a view to facilitate external trade and payment and for promoting the orderly development and maintenance of foreign exchange markets in India. The shift has also necessitated delegation of authority to the remitting banks i.e., the authorized dealers to vouchsafe the legality of the forex transactions as also collection of applicable income tax.

Tax is deducted at source [TDS] on passive income i.e., income which accrues to a non-resident without a physical existence in the country [in the form of a branch office or a local subsidiary etc]. The remittances that form the taxable base are captured in the "invisibles" account of the Balance of Payments [BoP] computed by the Reserve Bank of India.

The country has witnessed a robust growth in outward remittances. The global economic downturn has prompted countries to close loopholes in tax especially through tax havens. We felt that it would be topical to conduct a study on the effectiveness of institutional mechanisms in the tax department to maintain oversight on outflows and bridge the tax gap.

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