India has given Cyprus two months to provide information on certain funds flowing from the island nation before deciding on whether to roll back suspension of tax benefits on investments made from there.
"We have sought information on some investments made from Cyprus to India under the double taxation avoidance agreement and given them two months time," a top Finance Ministry official said.
Depending upon the information provided, the official said the government ‘will take a decision on suspension of tax pact with Cyprus’.
India and Cyprus had entered into a Double Taxation Avoidance Agreement in 1994.
But in November this year, India classified the island nation as a notified jurisdictional area and suspended the tax benefits.
Following the notification, all payments made to Cyprus attracted a 30 per cent withholding tax and Indian entities receiving money from there were required to disclose the source of funds.
India took the decision to withdraw tax benefits on grounds that Cyprus was not providing information requested by tax authorities
"Cyprus was not cooperating till we classified them as notified jurisdiction. They came running. Now we have given them the long end of the rope. Let us wait and watch," the official added.
Recently, Cyprus said that the Indian government has agreed to withdraw a notification that suspended tax benefits for investments from the island nation.
The withdrawal is subject to Cyprus, one of the main sources of foreign direct investment into India, adopting the global convention on exchange of tax information.
The Finance Ministry had classified the island nation as a notified jurisdictional area on grounds that Cyprus was not providing information requested by tax authorities under the taxation treaty.
In a recent statement on renegotiation of the existing Double Tax Avoidance Agreement, Cyprus also said a new tax treaty is expected to be finalised soon.
Cyprus also said it would adopt provisions of Article 26 of the OECD Model Tax Convention relating to exchange of information in a new DTA between the two countries.
Paris-based advisory group Organisation for Economic Cooperation and Development sets the global standards on tax matters.