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Frequently Asked Tax Questions by Qualified Foreign Investors (QFIs) 1
December, 28th 2012
       Frequently Asked Tax Questions by Qualified Foreign
                                      Investors (QFIs)1




Q.1.    What is Permanent Account Number (PAN) Card?
Ans:    Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued by
        the Income Tax Department of India to any "person" to facilitate him in making tax
        payments filing, returns and claiming refunds.        The number, along with other
        relevant details, is printed on a card called PAN card.


Q.2.    Are QFIs required to obtain PAN Card to comply with tax norms in India?
Ans: Yes. Under the current provisions, QFIs would be required to obtain PAN card. The
        process of obtaining a PAN card is simple, and user friendly. An application can be
        filed by a foreign investor online and the process can be completed within 2 to 3
        weeks.


Q.3.    What are the benefits to QFIs of having a PAN Card?
Ans: QFIs who have a PAN card would be eligible for tax deduction at source (TDS) as per
        the rates applicable in the Double Taxation Avoidance Treaty (DTAA) of the country
        of which the QFI is a resident, if it is more beneficial than the rate prescribed under
        the domestic law. If a QFI has not obtained a PAN card it would be subject to a
        higher rate of tax deduction under Section 206 AA of Income Tax Act, 1961.


Q.4.    How QFIs can apply for a PAN Card?
Ans:    In order to facilitate QFIs in applying for a PAN as well as to comply with Know
        your Customer (KYC) norms of the Securities Exchange Board of India (SEBI), a
        combined form (FORM 49 AA) has been notified by the Central Board of Direct Tax
1
  Disclaimer: These FAQs are prepared with a view to help QFI applicants to get generic
understanding of the tax framework. These FAQs cannot be used in a court of law to interpret any
circular, rules, regulations, statutes etc., one way or the other.
                                                                                      Page 1 of 8
       (CBDT). Form 49 AA and detailed instructions regarding how it is to be filled up are
       available at :

       http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/itr62form49
       aa.pdf
       http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/Not58_2011.
       pdf





Q.5.   Can QFIs make an On-line application for PAN Card?
Ans:    Yes, application for allotment of PAN can be made online through the Internet.
       Further, requests for changes or correction in PAN data or request for reprint of PAN
       card (for an existing PAN) may also be made through the Internet. Online application
       can be made either through the portal of National Securities Depository Limited
       (NSDL) (https://tin.tin.nsdl.com/pan/index.html)
       or portal of UTI Infrastructure Technology and Services Limited (UTITSL)
       (http://www.utitsl.co.in/utitsl/uti/newapp/new-pan-application.jsp).         Supporting
       documents required to be submitted by QFIs to obtain PAN card are listed at the
       following link:
       http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/Not58_2011.
       pdf


Q.6.   What are the attestation requirements for a QFI for obtaining PAN card?
Ans:   For a QFI who is an individual, Rule 114 of the Income Tax Rules, 1961 read with
       Form No. 49AA, requires a copy of the passport to be filed (without any attestation),
       this will be taken as both proof of identity and proof of residence. For QFIs other
       than individuals, the process requires filing of copy of certificate of registration duly
       attested by an "apostille" or at the Indian Embassy in that country.
       In order to meet the know you client (KYC) requirements as prescribed by Securities
       Exchange Board of India (SEBI), the list of documents to be submitted by a QFI for
       KYC are available at:
       http://www.sebi.gov.in/cms/sebi_data/attachdocs/1340167306959.pdf

Q.7.   What are the tax related responsibilities of Qualified Depository Participants
       (QDPs)?



                                                                                      Page 2 of 8
Ans:    In order to facilitate investments by QFIs, the QDPs have been assigned the
       responsibility to act as a single point of contact for QFIs for all purposes including
       tax. For tax purposes, a QDP will facilitate the QFI to obtain a PAN card. QDPs will
       be responsible for any withholding tax in India before making remittance to QFIs.
       QDPs will also be treated as a representative assessee/agent of the QFI. For this
       purpose QDPs would be required to submit a declaration that they have no objection
       to being treated as a representative assessee/agent of QFI. A QDP may ensure that
       the broker engaged by it for undertaking QFI transactions deducts and deposits tax
       at source failing which the QDP should deduct and deposit the tax on such
       transactions.



Q.8.   Can QFIs claim refund from Income Tax Department in India?
Ans: Yes. QFIs can claim refund from Income Tax Department for which the QFI would
       have to file its return of Income in India for that year.


Q.9.   Can a QFI carry forward losses over the years?
Ans: Yes. QFIs are allowed to carry forward losses over years provided the QFI files its
       return of income declaring the loss for the relevant year within the stipulated time
       limits.


Q.10. Whether profits earned by QFI from their investments in Indian securities market
       would be treated as Capital Gain or business income?
Ans: As per the Income-Tax Act, 1961, whether the profits earned from transaction in
       securities would be capital gains or business income will depend on facts and
       circumstances of each case like the number and frequency of transactions etc. Please
       refer to circular No.4/2007 dated 15/6/2007 issued by the Central Board of Direct
       Taxes.


Q.11. Whether QDPs should compute tax deduction at source (withholding tax) on QFI
      income for one settlement period on settlement basis or on transaction basis?
Ans: Currently, settlement on Indian stock exchanges is done at the end of every trading
       day. Tax deducted at source under the Income-tax Act, 1961 is to be deposited by the
       seventh day succeeding the end of each month. The withholding tax on QFI income
       will be computed on settlement basis and not on transaction basis since the stock


                                                                                   Page 3 of 8
      broker would credit the net proceeds of all transactions to QFIs on settlement basis
      for one settlement period
.
Q.12. For determining the tax deducted at source (withholding tax) liability, can QDPs
      set off losses of QFIs against profits earned on monthly basis in a given year?
Ans: As per TDS provisions, the deductor has to deduct tax either at time of payment of
      the amount or at time of credit of such amount (whichever is earlier). Therefore, any
      loss of current year available at such time of deducting tax would be eligible to be set
      off against the sum payable and the TDS shall be effected on net basis. However,
      TDS once effected cannot reduced by the deductor even if there is loss in subsequent
      transaction.


      Example, in a given year, a QFI makes three settlements, it earns profit of Rs. 200 on
      day one settlement, incurs a loss of Rs. 250 on day two settlement and earns profit of
      Rs. 100 on day three settlement. The TDS would be deducted on credit of net profit of
      Rs 200 whereas, no TDS shall be effected against profit of Rs. 100 as at time of credit
      of Rs. 100 a loss of Rs. 250 is available for set off and net basis there is no amount
      chargeable to tax.


Q.13. For the purpose of computing tax deducted at source (withholding tax) Can QDPs
      set off in the case of QFIs, the profits earned in one security against losses earned
      in another security during a given year?
Ans: Yes. For computing tax deducted at source (withholding tax) QDPs can set off profits
      earned by the QFI in one security against losses earned in another security as long as
      these securities are subject to Securities Transaction Tax (STT). Therefore, this would
      not be applicable in case of QFI investments in bonds as bond transaction are not
      subject to Securities Transaction Tax Such setting off for computing tax deduction at
      source would therefore be permissible only in the case of listed securities and mutual
      fund Units and redemption by mutual funds as these are subject to STT. The set off
      would again be subject to the general principle that an earlier loss of current year can
      be set off against subsequent profit which is credited or paid to the QFI. However, if
      tax deduction at source (TDS) has already been effected for a particular credit or
      payment, it cannot be reduced by subsequent loss. A QFI is, however, eligible to
      claim refund of excess amount of tax deducted at source (withholding) by filing a
      return of income for the relevant year.

                                                                                    Page 4 of 8
Q.14. For the purpose of computing tax deducted at source (TDS), can QFIs Set off of
       profits earned by a QFI in the current year against losses incurred in previous
       years?
Ans: No, A QDP cannot set off losses of a previous year of a QFI against profits earned in
       the current year by the QFI while computing the tax liability for deduction at source,
       which would therefore be based only on the profits of the year. However, QFIs can
       themselves set off their profits earned in the current year against losses incurred in
       previous years. For the purpose, the QFI would need to file its return of income
       within the time limits stipulated in the Income-tax Act, 1961. For this purpose, QFIs
       need to file return for the relevant year within the time limits stipulated in the
       Income-tax Act, 1961.


Q.15. What would be the applicable rates of taxation if a QFI comes from a jurisdiction
       with which India has a Double Taxation Avoidance Agreement (DTAA) as against
       one which comes from a non-DTAA Jurisdiction?
Ans:   The applicable rates of taxation in the case of investment from a country will be at
       the rate provided in the Income-tax Act or the rate provided in the Double Taxation
       Avoidance Agreement, whichever is more beneficial to the investors.


Q.16. Whether the capital gains arising on sale of shares are computed in Indian
       currency or in other currency?
Ans: The capital gains arising on sale of shares shall be computed by converting the cost of
       acquisition, expenditure incurred and full value of consideration in the same
       currency, as was initially utilized for purchase of shares and the gains so computed
       shall be reconverted in India currency.


Q.17. Whether DTAA provisions will apply while deducting tax at source?
Ans: Yes. Also see answer to question No. 15.


Q.18. Will the QDPs be held responsible for withholding taxes against profits on
       mutual fund investments by QFI's?
Ans: Income from investment from mutual fund may arise by way of distribution of profits
       by the fund or by way of redemption by the fund or by way of sale of units of the
       fund. In case of distribution of profits by the mutual fund, the mutual fund itself

                                                                                   Page 5 of 8
      pays tax on distribution of profits. In case of sale of units of the fund, the QDP would
      be required to withhold tax if the buyer of the mutual fund units has not deducted
      tax. In case of redemption of units by the fund or sale of units of the fund, the QDP
      would be required to withhold the tax.





Q.19. If the QFI is no longer the client of the QDP, then can the QDP be called upon to
      make good the shortfall in tax and liable to interest and penalty having acted in
      bonafide and good faith?
Ans: QDP, being a deductor, shall be liable for any short deduction or non-deduction of tax
      even after the QFI ceases to be the client of QDP.

Q.20. What are the deductible expenses that may be incurred by QFI for purchase & sale
      of shares and Mutual Funds?
Ans: The deductibility of expenses would depend on the fact that whether the income on
      the sale of shares is treated as business income or capital gains. In general if the
      income is treated as capital gains expenses like brokerage fees would be allowed.


Q.21. Whether QDP should treat residence certificate as a sufficient proof of residence
      and beneficial ownership of the shares in India by the QFI?
Ans: Prima facie, the Tax Residency Certificate is evidence of residence in a particular
      country and the QDP may rely on such a certificate. However, as per Explanatory
      Memorandum to the Finance Bill, 2012, the amended section 90 and 90A of the
      Income-tax Act makes submission of Tax Residency Certificate containing prescribed
      particular, as a necessary but not sufficient condition for availing benefits of the tax
      treaties.


Q.22. Whether the QDP is required to obtain an Income Tax Order under Section 195(2)
      of the Act for determining the income component (capital gains) on the sale of
      shares?
Ans: Central Board of Direct Taxes (CBDT) Circular No. 4/2009 dated 29/06/2009,
      clarifies that the term `payer' also means a remitter. As the QDP is making the
      payment of the income to the QFI, the QDP could be considered as a `payer' Under
      Section 195(2) of the Act, if any person responsible for paying any sum chargeable
      under the Act to a non-resident, considers that the whole of such sum would not be

                                                                                    Page 6 of 8
      income chargeable in the case of the recipient, he may make an application to the
      Assessing Officer(AO) to determine the appropriate proportion to such sum on
      which tax is to be deducted (TDS).
      The requirement of obtaining CA Certificate is only in the context of remittance of
      money outside India. It is not in the context of TDS liability. The QDP is custodian of
      all data in respect of transactions on which income has arisen to a QFI. It will also
      maintain the QFI account, wherein the QFIs' income is determined. Therefore, the
      QDP is supposed to deduct tax on the basis of sum chargeable to tax. In normal
      situations such as working out the capital gains on a transaction, there would not be
      any difficulty and QDP can itself determine the amount chargeable to tax and deduct
      tax thereon or take help of Chartered Accountant in this behalf. However, in case
      there is complexity in determining such income the QDP should approach the
      Assessing Officer for determination u/s 195(2). Even for other deductees, it is not
      mandatory that in each and every case, they should obtain 195(2) order before
      deducting TDS. However, in case a complex issue, it is advisable to do so. This is
      because the liability to deduct proper taxes remains on the deductor (i.e. QDP).


Q.23. For the purpose of computing tax deduction at source (withholding tax), what is
      the proof and declaration that the QDP can rely upon for allowing the full time
      benefit of a DTAA to a QFI?
Ans: There is no standard set of documents on the basis of which the DTAA treaty benefit
      can be said to have been rightly allowed. It depends on the facts of each case. The
      treaty benefit is to be claimed by the person concerned before it can be allowed. For
      this purpose, the QDP should obtain the Tax Residency Certificate from the QFI.


Q.24. Having relied on the documentations and given the treaty benefits, if later the
      same is held not allowable by the tax officer, can the QDP be held responsible and
      called upon to pay for any shortfall in tax, interest and penalties?
Ans: The liability to deduct and pay proper taxes remains that of the QDP as a deductor.
      Therefore, for any shortfall in tax QDP can be held responsible. The responsibility
      remains both for non-deduction or short deduction of tax if it is found that the treaty
      benefit have been incorrectly claimed or considered.




                                                                                    Page 7 of 8
Q.25. What is the maximum number of years in which an assessment can be done or
       reopened in case of TDS returns filed by the QDP?
Ans:    As the payment would be made to QFIs, who are non-residents, the Act does not
       prescribe any time limit for scrutiny of transaction for TDS purposes under section
       201 of the Act.



Q.26. Can the QDP be held responsible for withholding of tax at source in case of a QFI
       on sale considerations received under an open offer or buy back of shares where
       the purchaser of the shares is responsible for withholding tax and complying with
       the TDS filings under the Act?
Ans: Under the Income-tax Act, any person responsible for paying to a non-resident (not
       being a company) or to a foreign company, any sum chargeable under the provisions
       of the Act, has to deduct tax at the time of credit of such income to the account of the
       payee or at the time of payment, whichever is earlier. The responsibility of tax
       deducted at source by the QDP in the case of sale consideration received by a QFI on
       account of an open offer or a buyback of shares would depend upon the facts of the
       case. In case the purchaser of shares is crediting the sum to the account of the QFIs or
       making payment to QFIs, the purchaser would be required to deduct the tax.
       However, if the QDP is crediting the sum to the account of the QFIs or making
       payment to the QFIs, the QDP would be required to deduct the tax. Please also refer
       to question no.7.




                                           *****




                                                                                     Page 8 of 8
 
 
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