Tax liabilities and Exemptions to Non-residents

A Person who is non-resident is liable to tax on that income only which is earned by him in India. Income is earned in India if –

1. It is directly or indirectly received in India; or
2. It accrues in India or the law construes it as having accrued in India.   

The following are some of the instances when the law construes and income to have accrued in India: -

1. income from business arising through any business connection in India;
2. income from property if such property is situated in India;
3. Income from any asset or source if such asset or source is in India;
4. income from salaries if the services are rendered in India. In such cases salary for rest period or leave period will be regarded as earned in India if it forms part of service contract;
5. income from salaries payable by the Government to a citizen of India even though the services are rendered outside India;
6. income from dividend paid by an Indian company even if the same is paid outside India;
7. income by way of interest payable by Government or by any other person in certain circumstances;
8. income by way of Royalty if payable by the Govern­ment or by any other person in certain circumstances;
9. income by way of fees for technical services if such fees is payable by the Government or by any other person in certain circumstances

The following incomes even though appearing to be arising in India are construed as not arising in India: -

1. If a non-resident running a news agency or publishing newspapers, magazines etc. earns income from activities confined to the collection of news and views in India for transmission outside India, such income is not considered to have arisen in India. 
2. the case of a non-resident, no income shall be considered to have arisen in India if it arises from operations, which are confined to the shooting of any cinematography film. This applies to the following types of non-residents: -

i.      Individual who is not a citizen of India; or

ii.     Firm which does not have any partner who is a citizen of India or who is resident in India; or

iii.   Company, which does not have any shareholder who is resident in India.

 

Exempted income of non-residents

To avoid difficulties in working out the net income of a non­resident from his gross receipts in India, the law provides for taxation or most of the income of non-resident on 'Gross income basis', which means that the tax liability is determined on the basis of gross receipts without going into the question of expenses incurred in earning those receipts. Such 'Gross receipt basis^' taxation operates in two ways.

A.   By laying down the rate of tax to be applied on gross receipts. The rates are determined at a figure lower than the general rate of tax applicable to total income as it takes account of the possible expenses in earning the income. Such provisions are: -

a.      Tax on dividend (other than dividend from do­mestic companies), interest, royalty, fee for technical services and income from Units (Sec. 115A).

b.      Tax on income and capital gain in respect thereto from units purchased in foreign currency by off shore funds (Sec. 11 SAB).

c.       Income and capital gain in respect thereto from Bonds and shares purchased in foreign currency or acquired in resulting or amalgamated com­pany as a result of demerger or amalgamation (Sec 115 AC.).

d.      Tax on income other than dividend of Foreign Institutional Investors from Securities & Capital gains arising from their transfer (Sec. 115 AD).

e.      Income of sportsman or Sports association (Sec. 115BBA).

B.   By laying down a percentage to be applied on gross receipts to determine the net income. The tax is then calculated at the normal rate of tax on such presumptive income. Such provisions are: -

a.      Profits of shipping business (Sec. 44B)

b.      Profits of business of providing services etc. to be used in the business of prospecting, explora­tion or production of mineral oils (Sec. 44BB)

c.       Profits from operation of aircraft (Sec. 44BBA)Profit from business of civil construction etc. in certain turnkey power projects (Sec. 44BBB)

Non-Resident Indians and Investment in India

With a view to attract investment by Non-resident Indians and Indian Nationals living abroad, special provisions exist to provide incentives in the form of reliefs and concessional tax rate as also simplifying the tax assessment procedure for such persons. Non-resident Indian has been defined as an individual, being a citizen of India or a person of India origin, who is not a resident. A person is of Indian origin if he or either of his parents or any of his grand parents was born in undivided India.

 

Provisions for tax avoidance

When in a business carried on between a resident and non-resident, the course of business is arranged in a manner that the business produced to the resident either no profits or less than the ordinary profits, the Assessing Officer would determine the profits which may reasonably be deemed to have been derived therefrom. This problem arises where the dealings between the two are not at arms length and arrangement through transfer pricing is resorted to reduce the profit taxable in India. In such situations, the assessing officer can take recourse to estimation of income on any rational basis. Rules 10 and 11 of Income Tax Rules govern the estimation of such income.

Assessment of non-residents through 'Agents' (Sec. 163)

A non-resident may be assessed to tax in India either directly or through agents. Persons in India who may be treated as 'agent of a non-resident are: -

1. Employee or trustee of the non-resident;
2. Any person who has any business connection with the non-resident;
3. Any person from or through whom the non-resident is in receipt of any income;
4. Any person who has acquired a capital asset in India from the non-resident.

A broker in Indian who has independent dealings with a non-resident broker acting on behalf of a non-resident principal is, however, not treated as an 'agent' of the non-resident, if the transactions between the two brokers are carried on in the ordinary course of their business.

Before any person is treated as andagent’ of non-resident, he is given an opportunity of being heard and any representation from him in the matter is considered.

 

Tax clearance certificate before departure from India

The following categories of persons are required to produce a tax clearance certificate from the concerned assessing officer prior to their departure: -

1. Persons who are not domiciled in India, and in whose case the stay in India has exceeded 120 days;
2. Persons of Indian or non-Indian domicile whose names have been communicated to the airlines/
shipping Companies by the Income Tax authorities;
3. Persons who are domiciled in India at the time of their departure; but
4. Intend to leave India as emigrants; or
5. Intend to proceed to another country on a work permit with the object of taking any employment or other occupation in that country; or
6. In respect of whom circumstances exist, which in the opinion of the income tax authorities render it necessary for him to obtain the Tax Clearance Certificate.

Such certificates is granted where there are no outstand­ing taxes under the Income Tax Act, the Excess Profits Tax Act, the Business Profits Tax Act, the Wealth Tax Act, the Expenditure Tax Act or the Gift Tax Act against him or where satisfactory arrangements have been made for the payment of any such taxes. Obtaining guarantee from the employer of the person leaving the country is one of the methods of ensuring satisfactory arrangement for payment of taxes. For those who have to go abroad frequently for employer's work, facility of one-time Clearance Certificate has been provided to the foreign employee who has a fixed tenure of service in India or upto 5 years on furnishing an employer's guarantee in the prescribed form for payment of any tax that may be found due against him during the entire period of contract plus two years.

Advance Rulings

With a view to avoiding dispute in respect of assessment of income tax liability in relation to the transaction undertaken by or with a non-resident, a scheme of Advance Ruling has been introduced by incorporating Chapter XIX-B in the Income Tax Act, 1961. The Scheme now enables the parties to obtain, in advance, a binding ruling from the Authority for Advance Rulings on issues, which could arise in determining their tax liabilities.

Such Advance ruling: -

1. Helps non-residents in planning their income tax affairs well in advance.
2. Brings certainty in determining tax liability.
3. Helps avoiding long drawn and expensive litigation.

A.    The advance ruling can be sought on any question of law or fact specified in the applications in relation to the concerned transaction.

B.    Advance ruling cannot, however, be sought where the question:-  

1. Is already pending in the case of the applicant before any income tax authority, the Appellate Tribunal or any court; or
   
2. Involves determination of fair market value of any property; or
   
3. Relates to a transaction, which is designed prima facie for avoidance of income tax.
   

C.   The applicant may seek advance ruling by making an application to the Authority in quadruplicate in the prescribed Form No.  34C either in the person or by an authorised representative or by registered post. The applicant is entitled to represent his case before the Authority either personally or through an authorised representative. If the applicant desires to be represented by an authorised representative, a duly authenticated document authorising him to appear for the applicant should be enclosed. The applicant may withdraw his application within 30 days from the date of filing the application.

D.   The application should be accompanied by a free of Rs. 2,500/- (two thousand five hundred Indian rupees) through a bank draft drawn in favour of the Authority for Advance Ruling payable at New Delhi.

E.    The advance ruling is required to be pronounced by the Authority within six months of the receipt of the application.

F.    Advance ruling pronounced by the Authority would be binding in respect of the transaction(s) in relation to which ruling has been sought:-

1. on the Commissioner and the income tax authorities subordinate to him in respect of the applicant; and
   
2. on the applicant who had sought it.
   

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. If, however, 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.

A.    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.

B.    The rate at which tax is to be deducted at source will be the rates as specified in the Finance Act of the relevant year or the rate specified in any agreement for avoidance of double tax whichever is beneficial to the assessee.

In respect of income of the nature referred to in para 7.2(iii) arising to Offshore Funds and of the nature referred to in para 7.2(iv), tax is deductible at the rates at which such income is taxable.

C.    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.

D.    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.