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Non-residents are of the view they are not liable to pay tax in India. But they face a tax liability if they hold a capital asset in India and transfers it, leading to a gain or loss.
Non-residents generally believe they do not have to pay tax in India if they make a sale from outside the country and receive consideration abroad. This may not be the thumb rule as the Income-Tax Act (section 5 read with Section 9(1)(i)) spells out the tax liability arising on transfer of a capital asset in India; by treating it as income deemed to accrue or arise in India. This is also supported by judicial pronouncements. However, one may look out for any beneficial provision in the Double Taxation Avoidance Agreements when seeking relief from capital gains tax in the hands of non-residents.
India has signed agreements with several countries whereby capital gains arising on transfer of specified assets are taxable only in the country in which the transferor is a Tax Resident hence overriding the source rule.
Foreign investment boosts the economy. Lawmakers, to remove hardship on non-residents and to attract them to invest in India, have formulated special provisions in the Act in the form of concessional rate of tax and simplified assessment procedures.
Concessional rate
Non-residents are taxed at a concessional rate of 10 per cent on long-term capital gains arising from the transfer of Global Depository Receipts and bonds of an Indian company notified by the Central Government.
In case of investment in specified assets being shares or debentures of an Indian company by non-residents using foreign currency, the long-term capital gain would be calculated as follows: The consideration and cost of acquisition is first converted into the foreign currency used for purchasing the assets and the gain calculated. Such gain in foreign currency is reconverted to rupee to determine the tax liability. However, benefit of indexation is not available on the long-term capital gains so computed.
The 10 per cent for concessional rate long-term capital gain is applicable only for specified assets. Other investment income and assets would suffer a 20 per cent tax rate.
But what are specified assets? Shares, debentures, deposits of an Indian Public Company and Central Government security and such other notified assets are typically specified assets.
Non-residents are also eligible for exemption from long-term capital gains tax on transfer of a foreign exchange asset, if the net consideration is invested in specified assets or in any savings certificates within six months from the date of transfer with a lock-in period of three years for the new asset.
Where the income of a non-resident Indian comprises only of income from specified investments or long-term capital gains from such investments and appropriate tax has been deducted at source by the payer of income, the non-resident Indian is exempted from filing a return of income under Section 139(1) of the Act.
The Direct Taxes Code Bill-2010 (DTC Bill) to be effective from April 1, 2012, provides a new dimension with regard to taxation of non-residents on source rule.
The DTC Bill has a new provision excluding consideration from certain types of income on transfer of shares outside India by non-residents.
The DTC Bill containing provisions relating to ‘ income deemed to accrue or arise in India' is worded on similar lines of corresponding section in the Income Tax Act.
DTC Bill says income deemed to accrue in India will not include in the case of a non-resident any income from transfer, outside India, of shares or interest in a foreign company unless at any time in 12 months preceding the transfer, the fair market value of the assets in India owned by the foreign company, directly or indirectly, represent at least 50 per cent of the fair market value of all assets owned by the foreign company.
The recent Bombay High Court judgement in Vodafone case is an indication that the taxman is following an aggressive approach in assessing capital gains tax in the case of non-residents. If the ruling of the Apex Court goes against Vodafone, it will be evident that India has started recognising ‘look through' provisions incorporated in the DTC Bill.
(The authors are with PwC India)
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