TAXATION OF NON-RESIDENTS

TEST OF RESIDENCE

INDIVIDUALS

An individual is regarded as ‘Resident’ of India if:

He stays in India for 182 days or more during a previous year; OR
He stays in India for 60 days or more during a previous year, and 365 days or more during the 4 years preceding that previous year.

Following are exceptions to the above conditions:

A citizen who leaves India in any year for employment or as a member of the crew of an Indian Ship is not treated as resident in that year, unless he has been in India for 182 days or more (instead of 60 days).

An Indian citizen or a person of Indian origin, who is abroad, comes on a visit to India, in the previous year, the period of 60 days (in condition (2) above) is extended to 182 days.

A resident is regarded as “Not Ordinarily Resident” if:

He is a Non-Resident in India in 9 out of 10 previous years preceding the previous year; OR

He has stayed in India for 729 days or less during 7 years preceding the previous year.

An individual is regarded as “Non-Resident” if:

He does not satisfy any of the two conditions specified in (a) above.

HUF/FIRM/AOP

Resident : They are regarded as residents, even if some control and management is in India.

[Note: An HUF will be “Resident but Not Ordinarily Resident” if it is a Resident and its manager fulfils anyone of the conditions as mentioned in A(b) above]

Non-resident: They will be regarded as non-residents, if control and management is wholly outside India.

COMPANY

An Indian company is always treated as resident. Any other company would be a resident if the control and management of its affairs is situated wholly in India.

TAX INCIDENCE

Resident & ordinarily Resident – would income taxable.
Resident but not ordinarily Resident – Income earned/received in India or income deemed to accrue in India or income arising abroad out of business controlled in India is taxable.
Non-Resident – only income earned/received in India and income deemed to accrue or arise in India is taxable.

INVESTMENT INCOME OF A NON-RESIDENT

Interest income received by a non-resident from Government or from any other person in India is taxable in India.

Exempt Investment Income

Following types of interest incomes are exempted:

Interest on NRE/FCNR account paid or credited to individual non-residents Indians who are permitted by Reserve Bank to maintain such accounts. Sec. 10(4)(ii)
Interest on notified saving certificates (like NSC VI & VII) subscribed in foreign exchange before 1-6-2002, by a NR who is an Indian citizen or a person of Indian origin. Sec. 10(4B)
Interest, premium on redemption or any other payment on NRNR deposit and other securities, bonds, savings certificates, notified under section 10(15)(i). NRNR deposit interest is exempt in the hands of non-resident while he remains non-resident as per Income-tax Act.
Interest on “NRI Bonds 1988” and “NRI Bonds (Second series)” issued by SBI purchased in foreign exchange, exemption continues even after person becomes resident.
(S. 10(15)(iid). However, no exemption will be available in the year of premature encashment.
Interest paid up to 31st March, 2005 by a scheduled bank on RBI approved foreign currency deposits, FCNR & RFC A/c, to a NR or NOR [S. 10(15)(iv)(fa)]. [Exemption withdrawn for interest payable on or after 1st April, 2005 by the Finance (No. 2) Act, 2004]
Interest payable by Government or local authorities on moneys borrowed from sources outside India prior to 1-6-2001. [Sec. 10(15)(iv)(a)].
Interest on moneys borrowed by industrial undertaking prior to 1-6-2001 in a foreign country in respect of purchase of raw materials, components or plant and machinery and approved by Central Government prior to 1-6-2001 [Sec. 10(15)(iv)(c)].
Lease income from leasing of aircraft or aircraft engine received from an Indian company under an agreement is exempt from tax. However incomes under an agreement entered into between 1st April, 1997 and 31st March, 1999, and agreements entered into after 31st March, 2005, are not entitled to exemption.
Any income by way of dividends referred to in S. 115O received by a non-resident is exempt u/s 10(34). Any income received in respect of units of a Mutual Fund specified u/s 10(23D), or the specified company or an Administrator of the specified undertaking as defined in Sec. 10(35) is exempt u/s 10(35).
Any income arising from the transfer of a long-term capital asset, being an eligible equity share in a company purchased on or after 1st day of March, 2003 and before 1st March, 2004 and held for a period of twelve months or more is exempt u/s 10(36). Eligible equity share means: –

. Any equity share in a company which is a constituent of BSE 500 Index of the Stock Exchange, Mumbai as on the 1st day of March, 2003 and the transaction of purchase and sale of such equity share are entered into on a recognised stock exchange in India;

Any equity share in a company allotted through a public issue on or after the 1st day of March, 2003 and listed in a recognised stock exchange in India before 1st March, 2004. There is a change in the taxation of Capital Gains from sale of listed securities. See the relevant Income Tax Section for details.

Special Tax Rate and Surcharge applicable on Investment Income of Non-resident

Tax Rates
Sections 115A to 115AD prescribes tax rates for various types of investment income of different non-resident entities. However, if the non-resident is covered by a particular DTAA, then the rates prescribed under that DTAA would be applicable without any surcharge.
Surcharge
If a non-resident recipient of income is either an individual, HUF, AOP or BOI and his income (from all sources) is exceeding or likely to exceed Rs. 10,00,000/- in a Financial Year then a surcharge and education cess of 10 per cent is applicable.
In case of other non-resident entities, a surcharge of 2.5% and education cess is applicable.

. Income of non-residents in respect of interest received from Government or any Indian concern for money borrowed in foreign currency is taxed @ 20% subject to applicable surcharge and education cess. [Sec. 115A]

Tax on overseas financial organisation (approved by SEBI) in respect of income by way of long-term capital gain arising on sale/repurchase of units of Mutual Funds/UTI purchased in foreign currency is 10% subject to applicable surcharge and education cess. [Sec. 115AB]
Tax on non-resident in respect of interest on bonds of Indian companies issued as per Government notification, on bonds of PSU sold by Government and purchased in foreign currency, and on LTCG on sale of such bonds/GDRs/ADRs is 10% subject to applicable surcharge and education cess. [Sec. 115AC].

Tax on approved Foreign Institutional Investor (FII) is as follows:

. Income by way of interest on securities – 20%

Short-term capital gains on sale of such securities – 30%
Long-term capital gain on sale of such securities – 10% [Sec. 115AD]

Special Tax Rates for income of a non-resident sportsmen or Sports Associations

Income of non-resident sportsmen or sport association by way of i) participation in India in any game or sport or ii) advertisement or iii) contribution of article in newspapers, magazines etc. is chargeable at 10% subject to applicable surcharge and education cess (without allowing any deductions) [Sec. 115BBA]

BUSINESS INCOME OF NON-RESIDENTS

Income from business of operation of ships is taxable at 7.5% of the gross receipts from such business. [Section 44B]
Income from business of providing services or facilities in connection with plant and machinery on hire used or to be used in prospecting for or extraction or production of mineral petroleum & natural gas is taxable at 10% of gross receipts from such business, unless the assessee claims lower profits and gains by fulfilling the required conditions. If the non-resident claims that he has earned lower profits than that prescribed, he can keep proper accounts, get the same audited and file the audit report with the income tax return. The Income Tax Officer will then conduct a scrutiny assessment. [Sec. 44BB]
Income from business of operation of aircraft is chargeable at 5% of gross receipts from such business. [Sec. 44BBA]
Income of foreign companies from business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in respect of turnkey power project approved by the Central Government and financed under any international aid programme is chargeable at 10% of gross receipts from such business, unless the assessee claims lower profits and gains by fulfilling the required conditions. If the foreign company claims that it has earned lower profits than that prescribed, it can keep proper accounts, get the same audited and file the audit report with the income tax return. The Income Tax Officer will then conduct a scrutiny assessment. [Sec. 44BBB]
In any other case, for computing the business income of non-resident, expenditure in nature of head office expenditure is allowable up to 5% of the adjusted income as specified. [Sec. 44C]
For any other business, the present rate of tax for foreign companies is 40% plus a surcharge of 2.5% and education cess of 2% thereon. (i.e., 41.82%)

TAXATION OF ROYALTIES & FEES FOR TECHNICAL SERVICES RECEIVED BY NON-RESIDENTS

Royalties and Fees for technical services received by non-residents from an Indian concern or the Government are taxed as under:

. *Agreements entered into after 31st March, 1976 and before 1st June, 1977 – [Section 115A(1)(b)]

. Foreign Companies:

If agreement approved by Central Government, or is under Industrial Policy, Tax = 30% on Gross income

For other agreements, Tax = 40% on Gross income

Persons other than foreign companies – Tax is at applicable rates on Gross income.

Agreements entered into after 31st May, 1997 and before 1st April, 2003 – [Section 115A(1)(b)]

. Foreign Companies:

If agreement is approved by Central Government, or is under Industrial Policy, Tax = 20% on Gross income.
For other agreements, Tax = 40% on Gross income.

Persons other than foreign companies – Tax is at applicable rates on Gross income.

Agreements entered into after 31st March, 2003 – [Sections 44DA & 115A(1)(b)]

For all non-residents; i.e., Foreign companies and other persons:

. If the non-resident does not have a Permanent Establishment in India –

(a) If the agreement is approved by the Central Government or is under Industrial Policy, Tax = 20% on Gross income.
(b) If the agreement is not approved as mentioned in clause (a), Tax is at applicable rate on Net income.

If the non-resident has a PE, Tax is at applicable rates on Net income.

Agreements entered into on or after 1st June, 2005 – [Section 115A(1)(b)]

. Foreign companies

If the agreement is approved by Central Government, or is under Industrial Policy, Tax = 10% on gross income.

For other agreement, Tax – 40% as Gross Income.

Persons other than foreign companies. Tax is at applicable rates on Gross Income.

Any income by way of royalty or fees for technical services arising to any foreign company (as may be notified by the Central Government from time to time) under an agreement entered into with the Central Government for provision of services in connection with security of India is exempt. (Section 10(6C))

TDS BORNE BY THE PAYER

TDS borne by the payer in case of all payments to non-residents would be taxable in hands of the non-residents except in following cases:

royalty or technical service fees payment in respect of agreements with foreign company after 1-4-1976 and before 1-6-2002.
payment other than salary, royalty or technical services in respect of agreement made before 1-6-2002 between Central Government and international organisation or foreign government.
tax on perquisites borne by the employer u/s 192(1A).
payment of lease rent for aircraft or aircraft engine under an agreement entered into after 31st March, 1997 but before 1st April, 1999, or entered into after 31st March, 2005.

ACTUAL COST OF AN ASSET BROUGHT INTO INDIA BY A NON-RESIDENT

For the purpose of computation of business income, ’Actual Cost’ of any asset brought into India by a non-resident would be computed as Actual cost of acquisition to the non-resident as reduced by notional depreciation as provided in the Income-tax Act, 1961, from the date of acquisition as if the asset had been used in India. (Sec. 43 Expl. 11)
Where an imported capital asset is acquired on deferred payment terms or out of the foreign loan the actual cost would be after taking into account the fluctuation in exchange rate. For this purpose, actual payment will be considered. (Sec. 43A).

DOUBLE TAXATION RELIEF

All provisions discussed above are subject to Double Tax Avoidance Agreements (also known as “Tax Treaties”) entered into with various countries. The provision of the relevant tax treaty or domestic law provision whichever is beneficial to the tax-payer would be applicable. [Sec. 90]

SPECIAL PROVISIONS FOR CAPITAL GAINS ON SHARES & DEBENTURES IN INDIAN COMPANIES EARNED BY NON-RESIDENT

First proviso to Sec. 48 provides that where investments in shares or debentures are made by a non-resident in a foreign currency then in order to compute the capital gains/loss that may arise on sale of such securities, sale proceeds must be converted in the same currency in which the original investments were made. Resultant capital gains/loss may again be reconverted into rupees to arrive at taxable capital gains/loss. The benefit of indexation will not be available in such cases.

SPECIAL PROVISIONS FOR NRIs – Chapter XIIA

115C

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

Investment income: Income derived from a foreign exchange asset (except dividend referred to in S. 115-O).

Foreign exchange assets: Specified asset acquired by NRI out of convertible foreign exchange.

Specified assets are

. Shares of an Indian company.

Debentures or deposits with an Indian company, not being a private company.
Any security of the Central Government.

Other notified assets (no such asset has yet been notified.)

115D and E : Computation of income

Particulars
Investment Income
L.T.C.G.

1
Deduction for Expenses
Not allowed
As per normal provision

2
Chapter VI-A Deductions
Not allowed
Not allowed

3
Tax Rate (excluding surcharge)
20%% plus surcharge
10% plus surcharge*

4
Exchange rate fluctuation provision – whether applicable?
Not applicable
No

* For applicability of surcharge refer paragraph 3B above
115 F: Exemptions of long-term capital gains

Capital gains arising on transfer of a specified assets, is exempt from levy of any tax on fulfilment of the following conditions:

. The asset transferred must be a long-term capital asset.

Net consideration must be invested in certain specified assets. (Refer para 10A (4) above – Section 115C)
Investment to be made within 6 months of transfer.

If only a portion of the net consideration is reinvested, then proportionate exemption is allowed.

New asset must be held for at least three years.

115 G: Option not to file income-tax return

NRI need not file an income-tax return , if –

. His total income consists only of investment income or income by way of long-term capital gains or both and

TDS has been deducted from such income.

115 H : Continuation of benefits after NRI becomes resident

Chapter XIIA shall continue to apply to investment income even after NRI becomes a resident, if he furnishes a declaration along with Return of Income to that effect. This benefit does not apply to dividend income from shares. However, as dividends are now exempt from tax in shareholders’ hands, it does not make any difference.
Sec. 115 I: NRI may opt out of Chapter XIIA
An NRI may elect not to be governed by the provisions of Chapter XIIA for any A.Y. by furnishing a written declaration to the A.O. with his return of income. If he does so, his total income for that A.Y. shall be computed and tax on such total income shall be charged in accordance with the other provisions of the Act.

EXEMPTION FROM FILING RETURN UNDER ONE-BY-SIX CRITERIA

All non-residents are exempt from application of one-by-six criteria under the first proviso to s. 139(1) [Notfn. No. 710(E) dt. 20-8-1998] for filing tax returns in India.