India follows residence-based tax system under which a resident is taxed on his global income while a non-resident is taxed on his income sourced in India
In the year 1991, India opened its doors for global investors by liberalizing its foreign investment policies, leading to the inflow of billions of dollars in various sectors of the economy. Apart from investment, India also witnessed movement of skilled professionals/entrepreneurs from across the globe. This brought the Indian tax regime to a central stage. India follows residence-based tax system under which a resident is taxed on his global income while a non-resident is taxed on his income sourced in India, i.e. ‘received’ or ‘accrued’ in India. A non-resident is also eligible for seeking beneficial tax treatment under the Double Taxation Avoidance Agreements (DTAA) entered into by India with other countries.
Salary received by the non-resident is taxable in India to the extent it relates to exercising of his employment in India. Salary received in India for services rendered outside India by a non-resident is not taxable in India. However, for a short-term presence, the non-resident can seek relief under the Dependent Personal Service (DPS) article of the DTAA between India and another country. Further, the non-resident can seek credit of taxes paid in India in his home country, subject to local laws, to mitigate double taxation of the same income.
Dividend received by a non-resident from an Indian company is exempt from tax in India. However, the Indian company pays corporate income tax on its taxable income and also pays dividend distribution tax on the dividends distributed to the shareholders, thus subject to multiple taxation prior to its repatriation to the foreign investors. Interest income earned by a non-resident from an Indian resident or the Indian government is taxable in India, for loan provided by the non-resident utilized in India. Rental income earned by a non-resident from house property situated in India is taxable under the India tax law.
A non-resident earning royalty or fees for technical services is required to pay taxes in India @ 10% (plus cess and surcharge). However, in case the said services do not qualify as royalty or fees for technical services as per the DTAA, no tax will be required to be paid or withheld at the time of remittance.
For example, for taxability of fees for technical services in India, it is necessary that the said service should be made available to the recipient of the service and in case the said condition is not satisfied, the fees paid for rendition of same will not be taxable in India.
Tax on capital gains in India is based on the nature of the capital asset and the period of holding of such an asset. In case of shares and securities listed on a stock exchange, short-term capital gains (holding period of less than 12 months) if subject to securities transaction tax (STT), is taxable @ 15%. However, long-term capital gains (holding period beyond 12 months and on which STT has been paid) is exempt from tax. Further, in case of unlisted shares and immovable property, the holding period for qualifying as a long-term capital asset is 24 months instead of 12 months. Long-term capital gains in case of assets other than shares and immovable property (holding period beyond 36 months) are taxable at a flat rate of 20% and short-term capital gains are taxed @ 30%.
Under the India-Singapore DTAA, a Singapore resident can claim tax benefit through the tax credit method where residents of the city-state can claim credit for taxes paid in India against the same income taxable in Singapore equal to the amount of tax paid in India or is liable to pay in Singapore, whichever is lower.
A non-resident is not liable to file income tax returns in India if he earns dividend and interest income on which tax is deducted at source by the payer. Further, in other cases, a tax return is required to be filed by a non-resident in case his income during the year exceeds minimum exemption limit (currently Rs2.5 lakh). Further, a tax return is also required to be filed in case the non-resident wishes to carry forward losses of earlier years.
The government has taken a host of measures by simplifying the tax policies and bringing clarity and certainty within the tax laws so as to reduce litigation for non-residents. Recently, the government constituted a new committee with a mandate to simplify existing direct tax laws. It is expected that in the days to come the Indian tax system will be simpler and assessee-friendly.
1. How is the residential status of an Indian individual determined?
The residential status of an individual is determined by the fulfilment of any one of the following conditions:
—The individual is in India in the tax year for a period of 182 days or more.
—The individual was in India for 365 days or more during the four years preceding the relevant tax year and was in India for a period of 60 days or more in that relevant tax year.
—If the individual leaves India in any tax year as a crew member of an Indian ship or for the purpose of employment outside India, only the first condition is valid. If above conditions are not fulfilled, the individual is a non-resident.
2. How is capital gain from transfer of shares taxed under the 2016 amendment of the DTAA between India and Singapore?
The third protocol amends the DTAA with effect from 1 April 2017 to provide for source-based taxation of capital gains arising on sale of shares in a company. In order to provide certainty to investors, investments in shares made before 1 April 2017 have been grandfathered subject to fulfilment of conditions in limitation of benefits clause as per the 2005 protocol. Further, a two-year transition period from 1 April 2017 to 31 March 2019 has been provided during which capital gains on shares will be taxed in the source country at half of normal tax rate, subject to fulfilment of conditions in limitation of benefits clause.
3. What are the conditions to avail of relaxation from higher withholding tax rule where a non-resident does not have a permanent account number (PAN)?
Earlier, on failure to furnish PAN on receiving an income by a non-resident, deduction on such income was at a higher withholding tax rate, irrespective of being eligible for the rates mentioned in DTAA. Recently, the government amended this provision where a non-resident will be eligible for DTAA tax withholding rates even in the absence of PAN, by providing the details of his name, email id, contact no., address in residence country, tax residency certificate issued by the resident country’s government and tax identification number or a unique identification number issued in the country of residence.