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Tax on foreign income of a repatriate Indian
June, 16th 2008

I was a resident of Australia for over 19 years from June 1983. I ceased to be an Australian resident from November 25, 2002, when I returned to India. I have been a resident of India since then. I had bought some shares in two Australian companies between 1993 and 1995 while I was a resident of Australia. I propose to sell these shares during this year. I would like to have your advice on the capital gains implication of the proposed disposal of the shares. Under the Australian taxation law a person who ceases to be an Australian resident can opt to be assessed for one-time CGT (capital gains tax) on the share on the date the person ceases to be a resident on the notional value of disposal, assuming that the shares were disposed of at market value on that date. Alternatively, the person can choose to defer payment of CGT when the shares are actually sold. I opted for the former alternative and paid CGT to the Australian Taxation office as at November 25, 2002. Under Article 13(5) of the Agreement between India and Australia for the Avoidance of Double Taxation, Income or gains derived for the alienation of share or comparable interests in a company....... may be taxed in the contracting state of which the company is resident. It would appear from the above that the shares I hold are subject to CGT only in the country of which the companies are resident (Australia, in this case) and there would be no further liability for CGT in India, when the shares are sold, while being a resident and ordinarily resident in India.

Since the reader has become a resident and ordinary resident from assessment year 2005-06, he is taxable on his foreign income, including capital gains under the domestic law in India in the year of sale.

Double Tax Avoidance Agreement can be invoked, if it spares liability imposed by the domestic law.

As far as capital gains tax is concerned, as the reader points out, capital gains on sale of shares of companies incorporated in Australia is taxable in Australia so that it is not taxable in India.

In fact, it has already been taxed in Australia on a notional basis even before sale under an option provided under Australian law.

A doubt may arise because the word used is may in the relevant Article reproduced in the letter.

The Agreement as between India and Australia is on the same model as under UN and OECD models. The argument that the use of the word may in the context of a similar agreement between India and Malaysia would enable India to tax the capital gains taxable in Malaysia, was negatived by the Madras High Court in CIT v V.R.R.M. Ramaswamy Chettiar (1995) 211 ITR 368 (Mad) even in the context of Malaysia not having tax on capital gains.

Similar view was taken in CIT v R. M. Muthaiah (1993) 202 ITR 508 (Kar), which has since been specifically approved by the Supreme Court in CIT v P. V. A. L. Kulandagan Chettiar (2004) 267 ITR 654 (SC).

The reader should not be liable to tax on capital gains on the sale of Australian shares.

There is, however, one more angle in the readers case.

The reader has suffered capital gains tax in 2002, but he proposes to sell the shares in 2008.

But this should make no difference, since Double Tax Avoidance Agreement makes sale of shares taxable only in the country where the company is incorporated.

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