CA Vishrut Shah
Taxability of Short Term Capital Gain (STCG) to Non-Resident u/s 111A vis-à-vis Non Discrimination Clause of DTAA
Taxation of a Non-Resident is always been a question of ambiguity and litigation for the known fact that none of the country never prefer to lose any potential income in the form of taxes and which many times results into either double taxation or illegitimate levy of tax. We have seen the case of Vodafone which was more like a roller coaster rise of up and down from various judicial authorities including changes in the laws with retrospective effect and against settling down in favour of the assesse.
Government has worked out various mechanism to stream line the same including 123 comprehensive double taxation avoidance agreements and Advance ruling authorities but still many cases it is observed that taxation of the transactions gets settled with judicial pronouncing only.
One such case of ambiguity is in terms of taxation of Short Term Capital gain arising out of sales of Equity shares or unit of equity oriented mutual fund by a Non-Resident.
Section 111A of Income Tax Act, 1961 includes –
– Any income chargeable under the head “Capital gains”, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund [or a unit of a business trust] which fulfills following two conditions :
(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and
(b) Such transaction is chargeable to securities transaction tax under that Chapter,
Capital Gain arising out of said transaction is taxed at the rate of fifteen per cent.
Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of fifteen per cent.
There by mean that when an assessee whose total income including income chargeable under the head Short Term Capital Gain is below income which is not chargeable to tax than there will be no tax levied on the said transaction or in cases where by total income exceeds income not chargeable under the income tax than benefits shall be available for an income covered up to basic exemption limit.
However these benefit is only available to Resident Individual & HUF.
As per the Section 195 of Income Tax Act, 1961 –
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LC) or section 194LD] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
Accordingly on such capital gain TDS is required to be deducted at the rate of 15% under Section 195 of Income Tax Act, 1961 from total income payable against short term Capital Gain to Non-Resident. However these Capital gain is taxed on gross amount and not on net amount after setting off the amount of any short term capital loss arise out of such transactions.
Hence a Non-Resident required to file Income Tax Return to claim back refund in case he has any short term capital loss during the said financial year.
However Non-Resident have to pay tax even though their total income do not exceeds the basic exemption limit as provided under Income tax Act, 1961 and they are not allowed to get benefit of basic exemption limit as defined under First Schedule as prescribed under Section 2 of Income Tax Act,1961.
These amounts to violation of Non-Discrimination clause signed by Indian government with various countries under Comprehensive Double Taxation Avoidance Agreement. These clause states as below-
“The nationals of a One Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under the same conditions are or may be subjected.
The provisions of this Article shall not be construed as obliging a one Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.
Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions”
It means that no Country should restrict any benefit to Non-Resident which benefit is clearly available to a resident of the country. Basic Exemption limit is available to all the individuals irrespective of fact whether he is resident or nonresident.
These clause restricts benefits of exemption limit to non-resident only and hence it results into violation of non-discrimination clause of DTAA entered by government. Non-Resident required to pay taxes on their short term capital gain Income right from Single rupee earn in India and can not avail the benefit of Basic Exemption limit thereon.
Currently the government has entered into DTAA with 123 countries out of which there is almost 87 countries with which government has agreed in these clause and which violates clause for Non-Discrimination Agreement. It also includes countries like Singapore, USA, Mauritius, Qatar, Philippines, Malaysia, and UAE etc. which contributes the maximum inflow by Non-Resident directly to India.
Hence corrective actions needs to be taken to benefit Non Resident and make India more Investment Friendly. So we have to wait for Mr. Finance Minister and his expert team to give thought into these directions and make favourable to boost up more investments in India from Non-Resident Individuals also.
(Author can be reached at +91-9824798534 or on [email protected])
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Republished with Amendments
The Article is very interesting and Highlights, the difference in Taxation of ST cap gains for RI and NRI. Highly informative. Thanks to the Author.