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February - March 2007
Is a non-resident Indian taxed in India?
It is always gladdening to the heart when it’s a situation of ‘home-coming’. And quite so in the case of our Non-resident Indians(NRIs) and the newly positioned Persons of Indian-origin (PIOs). In the last decade and more, there has been a flurry of activity wherein world-citizens having roots and ancestral linkage to India have made a bee-line to rekindle their relationship with their native land albeit still based in the country of their domicile. Equally nice is the red-carpet welcome and silver-plated invitations being doled out to them from the Government of India seeking their investments for mutual benefit. As significant is the fact that several Individuals and ‘association-of-individuals’ ,investor-groups and the like of different hues and shades have joined the band-wagon of Corporate conglomerates in making their investments in India’s increasingly attractive Economy. Therefore, it becomes all the more important for such an Individual or other like Investor to understand the implications of ‘making money’ in India - would he or she be exempted from the payment of tax on ‘income’ earned out of such investments or if otherwise, what are the provisions pertaining to such ‘profits’,etc…? (This article would steer the readers through the relevant Law applicable to an NRI in his native-land ).
Before proceeding further, it is important to note that the Government of India has always showered the NRIs & PIOs with a most-preferential treatment in all respects as it rightly recognizes this class of people as ‘patriots’ in the bargain often irking those other ‘patriots’ who have been living in India all their lives. So, there need be no cynicism about investing in India and making happy profits upon the sums so invested . What is required is being aware of the implications, applicability & extent of the tax-rate, wherever so applicable and not to ‘shy away’ from tax-structures. After all, taxation is a universal phenomenon in all types of Government.
By law, in India ‘Income-tax’ to be paid by an Individual is determined by his ‘residential – status’. A ‘Resident’ is a person who stays for the prescribed-period during a fiscal-year, ie. between 1st April and 31st March ,either for:
(i) 182 days or more ;
(ii) 60 days or more (182 days or more for NRIs) and has been in India ,in the aggregate, for a period of 365 days or more in the previous four(4)years. Hence, any person not meeting these norms is termed as a ‘NON-RESIDENT’ assessee .
(In the case of a Resident, an Individual is considered to be ‘ordinarily-resident’ in any fiscal-year if he has been a resident in India for nine(9)out of the previous ten(10)years and, in addition, has been in India for a total of 730 days or more in the previous seven(7)years. And, Residents who do not meet these conditions are called as ‘Not-ordinarily Resident’ ).
Thus, the residential-status of a person does not depend upon the Nationality or Domicile of the person for the purpose of income-tax computation in India.
In case of an Assessee who is not an ‘Individual’, the residence is determined on the basis of the place from where its affairs are controlled & managed . So, if the conrol and management of the affairs of a ‘foreign-company’ is during the relevant previous year, located wholly in India ,it shall be treated as ‘Resident’ in India. But where part of the control and management of the affairs of a ‘foreign-company’ is situated outside India , it will be treated as a ‘Non-resident’ Company .
The ‘non-resident’ will be taxable for the ‘Indian income’ whereas his ‘Foreign income’ will not be taxable . A ‘Resident-but-not-ordinarily resident’ assessee will also be taxable only for his ‘Indian income’ and not the ‘Foreign income’ . Undoubtedly, a ‘resident-and-ordinarily-resident’ person will be liable for tax w.r.t. both Indian-income as well as Foreign-income .
In regard to business-income, the ‘source-country’ would get the right only if there is a ‘permanent-establishment’ or a ‘fixed-place-of-business’ there .
The ‘net-income’ from the business-activity will be taxed according to the rate prescribed in the Finance Act of the concerned year .
Income derived by the rendering of professional services or other activities of independent nature are taxable in the country of residence except when the person deriving income from such services has a fixed base in the other country from where such services are performed .And, such an income is also taxable in the source-country if his stay exceeds 183 days in that financial-year .
Income from dependent personal services ,i.e; from an employment ,is taxed in the country of residence unless the employment is exercised in the other state . But even if the employment is exercised in any other state, the remuneration will be axed in the country of residence if :—
Either (a) the recipient is present in the source state for a period not exceeding 183 days ; or
(b) the remuneration is paid by a person who is not a resident of that state ; or
(c) the remuneration is not borne by a permanent establishment or a fixed base .
As regards other income, the Business-income in the hands of a Non-resident is chargeable to tax only when the same is either received in India or it accrues in India . The question as to where the income from business accrues or arises is a question of fact and is to be ascertained in individual cases . Help is available from the guiding principles of Section 9 of the Income Tax Act, 1956 in order to determine the question of accrual of business income in India . Accordingly, income from business operations is construed as accrued in India if it accrues or arises ,whether directly or indirectly , through or from any business connection in India . Instances indicative of such a ‘business-connection’ are :—
maintaining a branch-office in India for the purchase or sale of goods or transacting other business ;
appointing an agent in India for the systematic and regular purchase of raw material or other commodities or for the sale of the goods or for other business purposes ;
erecting a factory in India where the raw material purchased locally is worked into a form suitable for export outside ;
forming a local subsidiary company to sell the products of the Non-resident parent-company ;
having financial association between Resident and a Non-resident Company .
A Non-resident will not be liable to tax in India on any income attributable to operations confined to the purchase of goods in India for export, even though the Non-resident has an office or an agency in India for this purpose .
Where a Non-resident has an agent in India but makes sales directly to Indian customers ,there will be no ‘business-connection’ even if he pays to his agent an over-riding commission on such sales provided:
(a)the making of these sales can in no way be attributed to the existence of the agency or to any trading advantage or benefit accruing to the principal from the agency ;
(b)the contracts to sell are made outside India ,and
(c)the sales are made on a principal-to-principal basis.
Bi-lateral Double-tax Avoidance – Agreements require the presence of somewhat permanent nature of the Non-resident in India to be able to exercise the jurisdiction of taxing the business-income . Such a presence is established through the existence of a fixed place of business or relationship termed as a ‘permanent-establishment’ which may be in forms such as a place-of-management, a branch, an office, a factory, a workshop, a mine, oil-well or other place of extraction of natural resources, a building-site or construction or assembly-project which exist for an agreed period ,and the provision of supervisory-activities for a minimum agreed period on a building-site or a construction or assembly-project .
The Law is fair enough to not to seek to tax those profits which cannot reasonably be attributed to operations carried out in India .Even if there is a ‘business-connection’ in India or a ‘permanent-establishment’ exists only that part of the profits which can be attributed to activities through such ‘business-connection’ or ‘permanent-establishment’ can be subjected to tax in India .
The income of a Non-resident who is also not a citizen of India (or, of a firm in which no partner is resident or Indian citizen and that of a company in which no shareholder is a resident or Indian citizen ) will NOT be subjected to tax ,if such income arises from operations which are confined to the shooting of any cinematography-film in India . Likewise, the income of a Non-resident engaged in the business of running a news agency or of publishing newspapers, magazines or journals arising from activities which are confined to the collection of news and views in India for transmission out of India is NOT subjected to tax as it is not considered as accruing or arising in India.
As examined above, the Law does not seek to bring into the tax-bracket the profits which cannot reasonably be attributed to operations carried in India. Even if there is a ‘business-connection’ in India or a ‘permanent-establishment’ exists, only that part of the profits which can be attributed to activities through such ‘business-connection’ or ‘permanent-establishment’ can be the subject-matter of tax in India .The ‘net-income’ from such business-activities is calculated on the basis of the general principles governing the computation of business-income Yet another remarkable feature of the taxation-system for Non-resident assesses is that with a view to facilitate easy assessment and avoid the difficulties involved in adducing evidence to the Authorities, taxable business-profits of the following categories of businesses are computed not on an actual-basis but by applying a prescribed-rate on gross-receipts :—
Exploration,etc.of Mineral Oils;
Operation of Aircraft;
Foreign Telecasting companies;
Foreign companies engaged in business of Civil-construction,etc.in certain Turnkey Power-projects;
NRI Sportsman or Sports Association .
It is noteworthy that all profits, dividends, royalty,knowhow-payments that have been approved by the Government of India or the Reserve Bank of India can be repatriated . Some sectors like NRI Investment in Real-estates may attract a lock-in period . All things considered,it has been a genuine effort on part of the Government to truly support NRI-Investments which encourage local enterprises within the shores of India to be pumped with the much –needed capital from their brethren living abroad.
Simply stated, while every person who is an assessee and whose total income exceeds the maximum exemption limit becomes chargeable to tax at the rate (s) prescribed in the Finance Act and the income- tax so computed is to be paid on the total-income of of the previous-year in the relevant assessment-year, yet the NRIs enjoy the advantage of being ‘privileged’ assesses with virtually no impediments to tax-planning from their viewpoint of ‘having-the-cake-and-eating-it-too’ : they can invest their sums in India’s economy without having to lose their place of pride in their domiciled land either …Isn’t it a case of having the best of both the worlds? Quite so but let’s not envy them but emulate them for they are loyal to both themselves as well as their ancestors…!!!
(‘How to invest in Indian businesses ?
‘ in the next issue .)