Mutual funds will have to be careful while transferring redemption proceeds to non-resident investors, as they (mutual funds) could be categorised as “agents” by the tax department. This could have implications for the fund houses, as they will have to bear responsibilities such as payment of advance tax, and compliance with other provisions of the I-T Act.
According to a recent decision of the Mumbai Income Tax Appellate Tribunal in the Birla Sun Life Asset Management Company case, it held the company as “agent” of non-resident investors for paying redemption proceeds to them.
“The importance of this decision is that apart from withholding tax obligations, mutual funds will now be regarded as agents of non-resident investors for calculation for income tax purposes,” said Gautam Mehra, ED, PriceWaterHouseCoopers.
The company in this case, had not deducted tax at source while making redemption payments to non-resident unit-holders in UAE. This was because under the Double Taxation Avoidance Agreement between India and UAE, capital gains on sale of mutual fund units are not taxable in India. But the assessing officer held that since the non-resident unit-holders received income directly or indirectly from or through the assessee, it can be considered as an agent.
The assessee argued that since redemption proceeds were not taxable in India in the hands of non-resident unit-holders under Article 13 of the treaty they cannot be treated as “agents”.
But industry experts are puzzled, because normally representative assessee route is not used by the tax authorities. “They normally use the ‘withholding tax’ route,” said a senior official with a leading consultancy firm requesting anonymity. “It is a bit surprising that a section that is not used frequently has been applied here,” he added.
Also, the proceeding to deduct taxes was initiated separately and treating it as an agent will lead to double recovery of taxes.
The assessing officer’s contention was that proceedings for failure to deduct taxes is different from treating the assessee as an agent. The company had a dual role, one as an “agent” and the other as the payer who was required to deduct tax from the redemption proceeds paid to non-resident unit holders.
The tribunal also upheld the plea stating that income deemed to accrue or arise in India will be taxed as it includes transfer of a capital asset situated in India and said assessment proceedings could be taken against the assessee in regards to tax liability of non-resident investors.
But long term gains on equity oriented MFs are tax exempt under provisions of IT Act whether one is NRI or Res Indian unless the NRI has opted for special provisons to be taxed(for repatriable investments).