5 Taxation of Non-resident

8/3/2019 5 Taxation of Non-resident

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Incomes taxable in case of non-residents

In case the assessee is a non-resident in India, he is liableto pay tax on the following incomes:

(a) Incomes received or deemed to be received in India.

(b) Incomes which accrue or arise in India or are deemedto accrue or arise in India.

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Meaning of 'Non-resident'According to section 2(30), Non-Resident means a person who

is not a resident in India. However in the following cases, italso includes a person who is not ordinarily resident inIndia:

(a) Section 92-relating to computation of income frominternational transactions having regard to arm's lengthprice.

(b) Section 93-avoidance of income tax by transactionsresulting in transfer of income to non-residents.

(c) Section 168-Executors. 3


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Types of Non-resident in IndiaUnder Income Tax Act, non-resident in India can be of two types:

(a)Non resident Indian: According to section 115C(e), non-resident

Indian means an individual, being a citizen of India or a person ofIndian origin who is not a resident.

y a person shall be deemed to be of Indian origin if he, or either of hisparents or any of his grand-parents, was born in undivided India

y non-resident Indians can only be individuals.

(b) Any other non-resident person i.e. Foreign Nationals or foreigncompanies or Overseas financial organizations or foreigninstitutional investors, etc.

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Taxation of Non-residentsA) Incomes which are exempt from income-tax

In case of non-resident Indian/non-resident in India(a) Interest on notified securities or bonds held by a non-resident

including income by way of redemption of such bonds or intereston Non-Resident (External) Account in any bank in India inaccordance with the rules laid down for that purpose, in case of anindividual. [Section 10(4)].

(b) Interest on notified Savings Certificates issued before 1-6-2002which was purchased in convertible foreign exchange and held by

a non-resident who is a Indian Citizen or a person of Indianorigin. [Section 10(4B)].

(c) Tax payable on royalty or fees for technical service on behalf offoreign company in pursuance of an agreement entered into before

1-6-2002 [Section 10(6A)]. 5


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(d) Tax payable on certain income (not being salary, royalty or fee fortechnical service) of and on behalf of a non-resident or a foreigncompany by the Government or the Indian concern in pursuance of anagreement entered into before 1-6-2002. [Section 10(6B)].

(e) Tax payable on income from leasing of aircraft, etc. under an agreemententered into after 31-3-1997 but before 1-4-1999 or entered into after 31-3-2007 [Section 10(6BB)].

(f) Income of foreign companies providing technical services in projectsconnected with security of India. [Section 10(6C)].

(g) Remuneration or fee received by non-resident/non-citizen/citizen butnot ordinarily resident 'consultants'^ for rending technical consultancyin India under approved program including remuneration of theiremployees, and income of their family members which accrue or arise

outside India. [Sections 10(8A), (8B) and (9)]. 6


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(h) Interest on notified bonds. [Section IO(15)(//W)].

(i) Interest to Foreign Banks on any deposits made by it withthe approval of the RBI, with any scheduled bank. [Section

10(15)(//7o)].

(j) Interest payable by Government/Financial Institutions, etc.on money borrowed by it or debts owed by it before 1-6-2001to sources outside India. [Section 10(15)(/v)].

(k) Any payment made by-an Indian company to acquire anaircraft on lease from foreign Government or enterpriseunder an agreement entered into before 1-4-2007. [Section

10(15 A)]. 7


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(B) Incomes which are taxable

A Non-resident person, other a company, having total incomeexceeding the maximum exemption limit is liable to pay tax at thesame rate as in the case of a resident assessee except in the

following cast"!'.

1. Income from certain specified assets/sources falling undersections 115A, 115AB, 115AC, 115AD, 115BBA covered under ChapterXII of the Income-tax Act.

2. Certain Incomes of Non-resident Indians covered under ChapterXIIA of Income-tax Act, the non-resident Indian has been givenan option to pay tax either under Chapter XIIA at certain specialflat rates or as per the other provisions of the Act.It may be mentioned that the non-residents, including foreigncompanies, are also liable to surcharge, on income-tax as well as

education cess. 8


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Determination of income in case of non-

residents [Rule 10]In any case in which the Assessing Officer is of opinion that the actual amount of

the income accruing or arising to any non-resident person whether directly orindirectly, through or from any business connection in India or through or fromany property in India or through or from any asset or source of income in India

or through or from any money lent at interest and brought into India in cash orin kind cannot be definitely ascertained, the amount of such income for thepurposes of assessment to income-tax may be calculated:

(i) At such percentage of the turnover so accruing or arising as the AssessingOfficer may consider to be reasonable, or

(ii) On any amount which bears the same proportion to the total profits and gainsof the business of such person (such profits and gains being computed inaccordance with the provisions of the Act.) as the receipts so accruing or arisingbear to the total receipts of the business, or

(iii) In such other manner as theA

ssessing Officer may deem suitable. 9


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Tax on dividends, interest, royalty and technical

service fees in the case of foreign companies(Section 115A)

Tax on dividends/interest income of non-resident including aforeign company [Section 115A(l)(a)]

Specialprovisions regarding rate of tax: Where the total income of a non-resident or of a foreign company, includes any income by way of:(i) Dividends, or

(ii) Interest received from Government or an Indian concern on moniesborrowed or debt incurred by Government or the Indian concern inforeign currency; or

(iii) Income received in respect of units, purchased In foreign currency, ofa Mutual Fund specified under section 10(23D) or of the Unit Trust ofIndia. However, this income shall again be exempt w.e.f. assessment year

2004-05 as per section 10(34). 10


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The income tax on the total income of such person

shall be chargeable at the following rates:

(a) On the dividend income (other than dividend referred toin section 115-O) 20%

(b) On the interest income covered under clause (ii) above20%

(c) On the income from units referred to in clause (iii)above.Exempt

(d) On the balance income included in the total incomeSpecial

rates/Normalrates as the

case may be11


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Tax on income by way of royally/fee for technical

services received by a non-resident/foreign company[Section 115A(l)(b)Special provisions regarding rate of tax:Where the total income of a non-

resident or a foreign company includes any income by way of royalty or fees fortechnical services other than income referred to in section 44DA(1)receivedfrom Government or an Indian concern in pursuance of an agreement made by

the non-resident/foreign company with Government or the Indian concern, theincome tax on total income of such non-resident/foreign company shall bechargeable at the following rates:

(a) On the income by way of royalty and fee for technical services received inpursuance of an agreement made after 31-3-1976 but before 1 -6-1997 30%

(b) On the income by way of royalty and fee for technical services received inpursuance of an agreement made after 31-5-1997 but before 1-6-2005 20%(c) On the income by way of royalty and fee for technical services received in

pursuance of an agreement made after 31 -5-2005 10%(e) On the income covered under section 115A(l)(tf) covered at the rates given

under para 10.5Aabove in that para i.e. 20%

(f) On the balance income included in total incomeSpecial/normal rates as the case may be12


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Consequential provisions due to special

rate of tax u/s 115A(l)(a) and (b)1. No deduction of any expense or allowance: Since special rate of tax are

applicable in case of income by way of dividend other than dividend referred toin section 115-O, interest, royalty and fee for technical services, no deduction inrespect of any expenditure or allowance shall be allowed to the assessee

2. No deduction under Chapter VIA from such income except in case of income byway of royalty and fee for technical services

3. No return of income necessary in some cases: As per section 115A(5), no returnis required to be submitted in this case under section 139(1) if the followingconditions are satisfied:(a)The total income of the assessee consist only of such dividend and interestmentioned in clause (a) of in this section, and

(b)The tax deductible at source has been deducted from such income.However if there is a income from royalty or fee for technical services, thereturn of income in that case is required to be submitted under section 139(1).13


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4. Set off in carry forward and set off of losses allowed fromincomes mentioned under section 11SA but unabsorbeddepreciation not allowed'.

However, the unabsorbed depreciation of any business of thecurrent year or any earlier year brought forward to this yearcannot be set off against the above incomes as it is coveredu/s 32 which falls within sections 28 to 44C.

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No special provision regarding capital gain on

the transfer of above income earning capitalassets under section 115A:

y In case any capital asset, on which income mentioned aboveis earned, is transferred during the previous year by the

non-resident, there are no special provisions given undersection 11SAwhich are applicable for taxing such capital gain.Hence, in such a case the regular provisions of taxing suchcapital gain shall apply.

y It may also be noted that where the total income of a non-resident individual is less than the maximum exemptionlimit, there is no provision of shifting the long term capitalgain to other income for claiming full exemption of Rs

1,60,000, as it is not allowed in case of non-residents. 15


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Tax on income from units purchased in foreign

currency and capital gains arising from their transfer[Section 115AB]

y This section is applicable only in case ofOverseas Financialorganisation,known as OffShore Funds.

ySpecial provisions regarding rate of tax [Section115AB(I): Where theincome of the above assessee, includes:(a) income received in respect of units purchased inforeign currency (exemptw.e.f. assessment year 2004-05); or(b) income by way of long-term capital gains arising from the transfer of unitspurchased in foreign currency: the tax on its total income shall be chargeable as

under:(i) on the income from units mentioned in clause (a)above 10% (but exemptw.e.f. A.Y. 2004-05)

(ii) on the income by way of long-term capital gains referred in clause (b)above 10%

(iii) on the balance income included in total income Special / Normal rates asthe case may be.

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Consequential provisions due to special rate of tax

under section 115AB(1)[Section 115AB(2)](1) Second proviso to section 48 not applicable:

Where the Gross Total Income includes income by way of Long Term CapitalGain mentioned under clause (b), above, the second proviso to section 48regarding indexation of cost of acquisition & improvement shall not beapplicable for such Long Term Capital Gain. The First Proviso to section 48regarding conversion of sale consideration and cost, etc. in foreign currencyfor computation of Capital Gain otherwise is not applicable as the same isapplicable only for shares and debentures of an Indian company.

(2) No deduction under section Chapter VIA from such income:

No deduction under Chapter VIA(80C to SOU) is allowed from the long-termcapital gain. But where the Gross total income of the Overseas FinancialOrganization consist of other incomes also, then the deduction under ChapterVIAwill be available in respect of other incomes. The normal provisions of theIncome-tax Act will apply to the other incomes. It may, however, bementioned that deduction under Chapter VIA is not allowed from short-termcapital gain on shares referred to in section 111A.

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(3) No exemption from filing of return:

There is no exemption for filing return of income even if the total

income of such offshore funds consists of only such income andincome from long-term gain on transfer of such units.

(4) Carry forward and set off of loss allowed but unabsorbeddepreciation not allowed:

The provisions of Chapter VI regarding set off of current year lossand set off of brought forward losses shall be applicable in thiscase. Thus if there are current years losses from other heads ofincome, these can be set off from long-term capital gain from suchunits. Further if there are brought forward long-term capital

losses, these can be set off from long-term capital gain.

Consequential provisions due to special rate of

tax under section 115AB(1) [Section 115AB(2)]

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Tax on income from bonds or global depository receipts

purchased in foreign] currency or capital gains arming fromtheir transfer [Section 115AC]

Specialprovisions regarding rate of tax: Where the total income of an assessee beinga non-resident, includes

(a) income by way of interest on bonds purchased inforeign currency of

(i) an Indian company issued in accordance with such scheme as the CentralGovernment may. by notification in the Official Gazette, specify in thisbehalf; or

(ii) a public sector company sold by the Government;

(b) income by way of long-term capital gains arising from the transfer of bondsreferred to in clause (a) or, Global Depository Receipts purchased by him in foreign

currency, the income-tax on the total income shall be chargeable as under:(i) on the income by way of interest in respect of bonds referred to in clause (a)

above 10%(ii) on the income by way of long-term capital gains referred to in clause (b),

above 10%.(iii) on the balance income included in total income Special/normal rate as the

case maybe 19


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Consequential provisions due to special rates of tax under

section H5AC(1) [Sections 115AC(2)/(3)/(4)/(5)](1) No deduction of any expenses or allowance: Where the gross total

income of the non-resident consists only of income by way of interestin respect of bonds referred to in clause (a) above, no deduction undersections 28 to 44C or section57(iii) shall be allowed from such interestincome.

(2) Both provisos to section 48 shall not apply: Where the Gross TotalIncome includes income by way of Long Term Capital Gain mentionedunder clause (b) above, neither proviso 1, nor proviso 2 to section 48shall apply for the computation of such Long Term Capital Gain. Inother words, if there is a short-term capital gain proviso 1 to section 48relating to conversion of sales consideration and cost in foreigncurrency shall apply.

(3) No deduction under Chapter VIA: No deduction under Chapter VIA(sections 80C to 80U) shall be allowed from such income by way of

interest. Deduction under Chapter VIA

is otherwise not available fromlong-term capital gain included in Gross Total Income. 20


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Consequential provisions due to special rates of tax

under section H5AC(1) [Sections 115AC(2)/(3)/(4)/(5)]

(4) No return of income necessary in a particular case: No return is requiredto be submitted under section 139(1) if the following conditionsare satisfied:

(a) The total income of the assessee consist only of income by way of interest,and

(b) The tax deductible at source has been deducted from such income.However, if there is income by way of long-term capital gain from the transferof such bonds and GDR's, the return of income is required to be submittedunder section 139(1).

(5) Carry forward and sc' off of losses allowed but set off of unabsorbeddepreciation not allowed'. Although no expenditure/deduction mentioned inpoints 1 and 2 above are allowed but the provisions of Chapter VI regarding setoff, carry forward and set off of losses are applicable and such losses can be setoff against the above incomes subject to the provisions of Chapter VI. However,the unabsorbed depreciation cannot be set off against the above income as it iscovered under section 32.

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Consequential provisions due to special rates of tax

under section H5AC(1) [Sections 115AC(2)/(3)/(4)/(5)]

(6) Transfer of bonds/GDRs by a non-resident to another non-resident outside India is not a transfer. It may also be observedas per section 47(vii a) relating to transactions not regarded as

transfer, any transfer of bonds/GDRs mentioned above madeoutside India by a non-resident to another non-resident shall benot regarded as transfer for capital gain purposes.

(7) Where the assessee acquired Global Depository Receipts or

bonds in an amalgamated or resulting company by virtue of hisholding Global Depository Receipts or bonds in theamalgamating or de-merged company, as the case may be, inaccordance with the provisions of sub-section (1), the provisionsof that sub-section shall apply to such Global Depository Receiptsor bonds.

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a) Income received in respect of securities (other than units of mutual funds covered under

section 10(23D) or of Unit Trust of India); orb) Income by way of short-term or long-term capital gains arising from the transfer of such

securities.

The income-tax on the total income shall be chargeable as under:

(i) On the income in respect of securities referred to in clause (a), above , 20%

(ii) On the income by way of short-term capital gains referred to in clause (b) above, 30%

(iii) On the income by way of long term capital gains referred to in clause (A), above , 10%.

(iv) On the balance income included in total income Special/normal rate as the case may be

Specialprovisions regarding rate of tax:Where the total income of the above assessee includes:

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Consequential provisions due to special rate of

tax under section 115AD1. No deduction under Chapter IV or Chapter VIA: Where the gross total income of theassessee includes income in respect of securities mentioned in clause (a) above, neitherdeduction under section 28 to 44C nor under section 57C, nor under Chapter VIA (80C to8OU) shall be allowed from such income.

2. Both provisos 1 and2 to section 48 not applicable: For computing long term andshort-term capital gain on the transfer of securities mentioned above, both the proviso 1and 2 to section 48 shall not be applicable.

3. No exemption of filing any return: There is no exemption for filing return of income

for incomes mentioned under this Section.

4. Chapter VI applicable: The provisions of Chapter VI relating to set off, carry forwardand set off of losses shall however, be applicable in this case also but unabsorbeddepreciation shall not be allowed to be set off against the income referred to in section115AD.

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Tax onNon-Resident sportsman or sports

associations (Section 115BBA)Sub-section (1)(a) of this section is applicable to a sportsman (including an athlete)who is not a citizen of India and is a non-resident:

Special provisions regarding the rate of tax: Where the total income of the above sportsman

includes income received or receivable by way of;

(i) Participation in India in any game (other than a game the winnings wherefrom are taxableunder section(115BB) or sport; or

(ii) Advertisement; or

(iii) Contribution of articles relating to any game or sport in India in newspaper, magazines or

journals;

such income shall be chargeable to tax @ 10% and the balance income included in the total

income at the normal rate.

Section (1)(b) of this section is applicable to non-residents sports association orinstitution Special provisions regarding rates of tax: Where the total income of the non-resident

sports association/institution includes any amount guaranteed to be paid or payable to such

association or institution in relation to any game or sport played in India, the tax shall be

payable on such income @ 10% and on the balance income at normal rates. 25


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Special provisions Relating to certain incomes of non-resident Indian

as per Chapter XIIA of Income-tax Act [115C to 115-I]

The provisions ofChapter XIIA(Sections 115C to 115-1) are applicable only for the benefit of

Non-Resident Indian.

Tax on investment income and Long-term Capital Gains [Section 115E]

Special provisions regarding rate of tax: Where the total income of the non-resident Indianincludes:

(a) Any investment income; or

(b) Income byway of long-term capital gains from a foreign exchange specified asset, the tax on

the total income shall be chargeable as under:

(i) On the income in respect of investment income referred to in clause (a) above 20%.

(ii) On the income by way of long-term capital gains on specified asset referred to in clause (b)

above 10%.

(iii) On the balance total income included in the total income-

Amount of income tax which would have been payable on total income exclusive of income

referred to clauses(a) and (b) above. 26


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Investment income [Section 115C(c)]

For the purpose of above, "investment income" means any income derived from a foreign exchangeasset.

What is the foreign exchange asset [Section 115C(6)]Foreign exchange asset means anyspecified asset as given below which the assessee has acquired orpurchased with, or subscribed to in, convertible foreign exchange.

What is a specified asset [Section 115C(f)]Specified asset means any of the following assets, namely:(i) In an Indian company;

(ii) Debentures issued by an Indian company which is not a private company as defined in theCompaniesAct, 1956;(iii) Deposits with an Indian company which is not a private company as defined in the CompaniesAct,1956;(iv) Any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act,1956;(v) Such otherassets as the Central Government may notify.

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Capital gains on transfer of foreign exchange assets not

to be charged in certain cases(Section 115F)

y Where an assessee, who is a non-resident Indian, transfers anylong-term foreign exchange asset, he can claim an exemption inrespect of the long-term capital gains if the following condition is

satisfied.

He has invested within a period of six months after the date ofsuch transfer, the whole or any part of the net consideration in anyof the specified assets, i.e.:

(a) Shares of an Indian company;(b) Debentures of a Indian public limited company;(c) Deposit with an Indian public limited company;(d) Central Government securities;(e) Such other assets as may be specified.

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Quantumof deduction

(1) if the cost of the new asset is not less than the net consideration in respect of theoriginal asset, the whole of such capital gains shall be exempt;

(2) if the cost of the new asset is less than the net consideration in respect of the originalasset, so much of the capital gain as bears to the whole of the capital gains the sameproportion as the cost of acquisition of the new asset bears to the net consideration,shall be exempt. In other words, it may be calculated as under:

Long-term Capital Gain* (Amount invested/Net Consideration)

Withdrawal of exemptionThe exemption granted under section 115F will be withdrawn under the following

circumstances.

Where the new asset is transferred or converted into money within a period of threeyearsfrom the date of its acquisition, the exemption granted, on the basis of cost of the newasset, shall be deemed to be income chargeable under the head Capital gains of the

previous vear in which the new asset is transferred orconverted into money and shall betaxed as long-term capital gains.

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Return of income not to be filed in

certain cases [Section 115G]

y It shall not be necessary for non-resident Indian to furnishreturn of his income u/s 139(1) if;

(a) his total income in respect of which he is assessableunder this Act during the previous year consisted only of

investment income or income by way of long-term capitalgains from foreign exchange specified asset orboth; and

(b) the tax deductible at source has been deducted from

such income. 30


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Benefit under this chapter to be available in certain

cases even after the assessee becomes resident(Section 115H)

y Where a non-resident Indian becomes assessable as residentin India in any previous year, he, mayif he so opts, continue

to be governed by the provisions of this chapter in respect ofthe investment income of all the above foreign exchangeassets except shares of an Indian company untilthe transferor conversion (other than by transfer) into money of suchassets.

y If he decides to make such option, he will furnish to theAssessing Officer a declaration of the same in writing alongwith his return of income under section 139 for the

assessment year for which he is so assessable. 31


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Special provisions for computing profits and

gains of shipping business in the case of non-residents (Section 44B)

y Asum equal to 7.5% of

(a) the amounts paid or payable whether in or out of India to theassessee or to any person on his behalf, on account of carriage ofpassengers, livestock, mail or goods shipped at any port in India, and

(b) any amount received or deemed to be received in India by or onbehalf of the assessee, on account of carriage of passengers, livestock,

mail or goods shipped at any port outside India,

shall be deemed to be the profits of such business. The carriageamount will also include amount paid or payable or received ordeemed to be received by way of handling charge or any otheramount of similar nature.

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Special provisions for computing profits and gains of

business of operation of aircraft in the case of non-residents [Section 44BBA]

y Notwithstanding anything to the contrary contained in section 28to 43A, the income of a non-resident engaged in the business of

operation of an aircraft shall be computed at a flat rate of 5% of:

(a) the amount paid or payable whether in India or out of India tothe assessee or to any person on his behalf on account of carriage

of passengers, live-stock, mail or goods from any place in India,and

(b) the amount received or deemed to be received in India, on

account of carriage of, such items from a place outside India. 33


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Special provisions for computing profits and gains of foreign

companies engaged in the business of civil construction, etc.

in certain turnkey power projects (Section 44BBB)

y Notwithstanding anything to the contrary contained in

section 28 to 44AA

, in the case of an assessee, followingprovision would apply :

A sum equal to 10% of the amount paid or payable (whether

in or out of India) to the said assessee or to any person on hisbehalf on account of such civil construction, erection, testingor commissioning shall be deemed to be the profits and gainsof such business chargeable to tax under the head "Profits

and gains of business or profession". 34


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y The assessee can declare income under section 44BBB to be lowerthan 10% (Section 44BBB(2)|: Such assessee may claim lowerprofits and gains than the aforesaid amount of 10% if thefollowing two conditions are satisfied:

(a) The assessee keeps and maintains such books of account as arerequired u/s 44AA(2), and

(b) The assessee gets the accounts audited and furnishes a report of

such audit as required u/s 44AB.However, in this case, the Assessing Officer shall proceed to makeassessment of the total income/loss of the assessee only underscrutiny assessment as per section 143(3).

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Documents

5 Taxation of Non-resident