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§ Deductions on payments made to non residents. § It has been a focal point of long standing tax litigation.
Law in effect
• Section 195(1) of the Income-Tax (I-T) Act provides that where a person is responsible for paying any sum to a non-resident which is chargeable to tax in India, he is required to withhold tax at the time of such payment or credit of the income to the account of the payee, whichever is earlier.
• Section 195(2) provides that where the payer believes that the whole of such sum paid to the non-resident payee is not liable to tax in India, he may make an application to the assessing officer (AO) to determine the appropriate proportion of such sum so chargeable to tax and upon such determination, tax shall be deducted only on that proportion of the sum which is so chargeable.
• Circular No. 759 broadly provides that remittances to non-residents would be allowed to be made by the RBI without insisting on a ‘No Objection Certificate’ from the revenue authorities provided the person making the remittance furnishes an undertaking in duplicate, accompanied by a certificate from an accountant • Further, Circular No. 10/2002 provides the specific format of such an accountant’s certificate.
• In most cases, the revenue authorities are not accepting the position adopted in the accountant’s certificate, thus indirectly hinting that the payer should have approached the Revenue instead of adopting the accountant certificate route.
• The Supreme Court broadly held that if no application is filed by the payer under Section 195(2) of the I-T Act, income-tax would have to be deducted by the payer on the entire gross sum. • However, somewhat contrary to the above, the Supreme Court in the same ruling also held that the obligation of the payer to deduct tax under Section 195 is limited only to the extent of the appropriate proportion of income chargeable to tax under the I-T Act.
• Delhi Tribunal held that the law itself has provided an option, in case a payer is compelled to approach the Revenue then the Circulars issued by the Board would be rendered totally meaningless.
Basis Of Taxation In India
The basis of taxation for an Individual in India depends on his residential status, which. in turn depends on the period of stay of the individual in India. The duration is counted for each financial year i.e. From 1st April to 31st March. • Residential Status of individuals is divided into three categories, depending on the Period of stay in India. • Resident and ordinarily resident (R & O R) • Resident but not ordinarily resident (R B NoR) • Non Resident (N R)
Who is non resident
For individual term non-resident is negatively defined under section 6 of the Income-tax Act
Exceptions permitted to the Basic Conditions
ü Citizen leaving India “for Employment” no. of days will be considered as 182 ü Citizen or PIO coming to India “on a visit” no. of days will be considered as 182
Residential Status For Other Assesses
For Hindu Undivided family
ü Status of Manager of family will determine the status of HUF, whether Resident, R but NoR or Non Resident
ü If control and management wholly outside India.
ü Any Company would be a resident if control and management is not wholly in India.
Income Exempt from Tax for NRIs
ü Sec. 10 (4) (ii) Interest on NRE A/c. (wef A.Y.1991-92) Conditions: ü A/c should be maintained as per FEMA ü Person should be Person Resident Outside India as per FEMA. ü Available only to Individuals & not to HUF ü Sec. 10(15)(iv)(fa)- Interest on deposits made in foreign currency ü Deposits in foreign currency will include RFC deposits and FCNR deposits. ü Available to individuals and HUFs who are either Non Resident or R But NOR in terms of Sec. 6(6). Conditions:
*The rates further increases by surcharge and education cess. **Other than dividends on which Dividend Distribution Tax (DDT) has been paid.
Assessment of NRIs
A non-resident may be assessed to tax in India either directly or through agents. Persons in India who may be treated as 'agent1 of a non-resident are:Employee or trustee of the non-resident; Any person who has any business connection with the non-resident; Any person from or through whom the non-resident is in receipt of any income;
TABLE SHOWING TAX SYSTEM FOR NRI
Normal Tax regime LTCG @ 10% (without Indexation) Or 20% (with Indexation) —Threshold limit available —Rebate from Tax, Deduction from Income & LTCG exemption benefit available Concessional tax regime
LTCG @ 10% —Investment 20% —No threshold limit —No Indexation —No tax if investment within 6 months in specified Assets – Shares/ Debenture of Indian Company —No Deduction from Income & No Rebate from Tax No need to file tax Return if tax deducted at source
Provision for Non-Residents
Joint Holdings Special Exemption In Investment Income Concessional Tax Treatment Of Certain Incomes Simplified Remittance Procedure
• Non-residents can invest in the Indian Share Market, either individually or with an Indian relative and can certainly hold shares in the Demat Account. • The Reserve Bank of India (RBI) provides for repatriation benefits provided the investment is made by remittances from abroad or funds held in the non-residents’ NRE or FCNR account. • Tax incentives are ONLY for the non-residents, NOT residents.
• To simply the remittance procedure, non-residents can remit such proceeds or credit the same to their NRE Accounts provided tax (chargeable at 10%) arising on long-term capital gains has been deducted at source, that is by the bank concerned.
SPECIAL EXEMPTION IN INVESTMENT INCOME Income is totally exempt IF the income is either received
from units purchased from her/his NRE Account or from income generated from abroad. • There is tax exemption in case of units bought of NRI Bonds 1988 and NRI Bond (Second Series) continues even after the holder becomes a resident. • This exemption is also available to resident Indians who are either a nominee or survivor or have received such units as gifts.
CONCESSIONAL TAX TREATMENT OF CERTAIN INCOMES
• Apart from dividends and long-term capital gains from trading in Indian shares, income arising from any ‘Foreign Exchange Asset 1′ is charged at 20%, while the long term capital gain arising out of transfer of such asset is charged at 10%. • If tax has been deducted at source, the non-resident need not file any tax returns. The non-resident will enjoy such benefits even after he becomes a resident. • If the non-resident, wishes to be assessed under these provisions, she/he is required to file a declaration in writing along with return of income. • If the non-resident wishes NOT to be governed by these provisions, she/he may declare the same to the assessing officer and provide return of income for that assessment year
TDS For Non-residents
• The general rule of TDS in case of payments to Non Resident is given under Section 195 of the I T Act. However, if the services are given outside India by a Non Resident who is also paid outside the country , does not fall under the provision u/s 195 of the I T Act. Circular 786 of 7/2/2000 is reproduced below
Deduction of Tax at Source from payments to Non-residents
• Any person responsible for making any payment (except dividend declared after 1.6.97) to a non-resident individual or a foreign company is required to deduct tax at source at the prescribed rate at the time of credit of such income to the account of the payee or at the time of payment thereof. • person responsible for making the payment is the government, public sector bank or public financial institutions, deduction is to be made at the time of payment only.
• Where the person responsible for making such payments considers that the whole of such sum would not be income chargeable in the case of recipient, he may make an application to the assessing officer to determine the appropriate proportion of such sum which will be chargeable to tax and upon such determination tax is required to be deducted only on the chargeable proportion. For certain remittances, the Reserve Bank of India Exchange Control Manual requires production of a no objection certificate from the Income-tax authorities. The Central Board of Direct Taxes, vide circular No. 759 and 767, has simplified the procedure by dispensing with such requirement. The person making the remittance has only to furnish an undertaking (in duplicate) addressed to the Assessing Officer which should be accompanied by a certificate from a Chartered Accountant in the prescribed form. The undertaking should be submitted to the Reserve Bank of India or the authorised dealer in foreign exchange who will forward a copy to the assessing officer.
Refund of tax
• Any tax deducted in excess of the required amount is normally refundable to the non-resident on making a proper claim for it. Sometimes the non-resident returns the amount in respect of which tax was deducted or, circumstances occur in which tax is found to be non-deductible or, in which tax is found to have been deducted in excess and the non-resident is either not able to claim refund or does not show initiative in claiming such refund. In such cases, the CBDT has by circular No. 790 dated 20.4.2000 permitted refund of excess tax to the person making the deduction.
• I would like to express my serious concern related to the tax deduction at source for the interest paid to my NRO account. I did not find any obvious reason for deducting 30% of earned interest specially in view of the government stipulated norms and the ruling of the court of authority on this issue. I refer to the Authority for Advance Ruling in V. Ravi Narayanan In re (2008) 300 ITR 62 (AAR) where the court has ruled that interest from NRO account is to be treated as income in the nature of investment income vide clause (1)(b)(i)(A) of Part II of Schedule I of the Finance Act, 2007, and that the applicable tax rate is 20 per cent. • In view of the above, can NRIs in general ask for a refund of excess tax deducted by various Indian banks?
• An AAR ruling is applicable to that particular assessee only and for that particular case. It is not the law and the Bank cannot act based on an AAR ruling. • The interest on NRO is fully taxable at the rates applicable to Residents. • Under the Income Tax Act, it is mandatory for the banks to apply TDS (= Withholding Tax) on NRO interest as per Sec. 195. Unless the same is amended, the Bank has no option but to deduct the tax as specified under the law. • The TDS is not the same as your tax liability. This liability will be computed on the basis of the income tax rates which again depend upon your income and the exemptions, deductions and rebates you can claim. The TDS can be set off against your actual tax payable
Controversy And Dispute Between CBDT And CAG Over The Issue Of TDS On Payments Made To NON Resident Brokers By Indian Exporters
• C&AG raised an objection that the Assessing Officer in computing the Profits and Gains of Business or Profession, • had wrongly allowed a deduction in respect of a payment to a nonresident where tax had not been deducted at source. • The nature of the payment in this case was export commission and charges payable for services rendered outside India. • In the view of C&AG the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the Incometax Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges. The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to
• It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. • No tax is therefore deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable
Summary Table of Tax Implications of NRI Investment