The ultimate objective behind this article is to provide a brief idea in respect of Non Resident taxation and income tax rules and perks allowed to them which are way different from those applicable to resident Indians.
1. TEST OF RESIDENCE
a. An Individual is regarded as ‘Resident’ of India if:
i. . He stays in India for 182 days or more during a previous year;
ii. 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.
The short period of stay in India of “60” days, however gets extended to 182 days in following conditions
1. An Indian citizen who leaves India in any previous year for employment or as a member of the crew of an Indian Ship;
2. An Indian citizen or a person of Indian origin, who is abroad, comes on visit to India in any previous year.
Further, in case of an individual being citizen of India and member of crew of foreign bound ship leaving India, the period or periods of stay in India, in respect of such voyage shall be determined in manner and subject to conditions as may be prescribed.
b. An Individual is regarded as ‘Resident but not ordinarily Resident’ if:
i. He is a non-resident in India in 9 out of 10 previous years preceding the previous year
ii. He has stayed in India for 729 days or less during 7 years preceding the previous year.
c. An Individual is regarded as ‘Non-Resident’ if:
He doesn’t satisfy any of the conditions mentioned in (a) above.
An Indian company is always treated as resident in India. Any other company would be a resident if its ‘place of effective management (POEM)’ is in India.
For a company there could be many place of management but POEM will always be one. POEM is a place where key management and commercial decisions necessary for the conduct of the business as a whole are made. It is not sufficient to hold Board Meetings & AGM in the overseas jurisdiction but the team implementing such decisions should not be resident of India. Key Management Personnel such as CEO/CFO etc. should be resident of overseas jurisdiction where the foreign company is located.
2. TAX INCIDENCE
A. Resident & Ordinarily Resident – Global Income is taxable.
B. Resident but not Ordinarily Resident – Income earned/ received in India; or income which accrues or arises or is deemed to accrue or arise in India or income arising abroad out of business controlled in India is taxable.
C. Non-resident – Only income earned/received in India and income deemed to accrue or arise in India is taxable.
3. EXEMPT INVESTMENT INCOME
Following types of investment income are exempt:
1. Section 10(4)(ii):
Interest on NRE account paid or credited to individual non-residents Indian who are permitted by RBI to maintain such account.
2. Section 10(15)(i):
Interest, premium on redemption or any other payment on NRNR deposit and other securities, bonds, annuity certificates, savings certificates, notified under this section.
3. Sec 10(15)(ii)(c)
In the case of an individual or a Hindu undivided family, interest on such Relief Bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf.
4. Section 10(15)(iid)
Interest on ‘NRI Bonds 1988’ and ‘NRI Bonds (Second Series)’, issued by SBI purchased in foreign exchange, exemption continues even after person becomes resident. However, no exemption under this clause will be available in the year of premature encashment.
5. Section 10(15)(iv)(fa)
Interest paid by a scheduled bank on RBI approved foreign currency deposit, FCNR & RFC A/C to Non-resident or Not Ordinarily Resident is exempt.
6. Section 10(15)(viii)
Any interest received by a non-resident or a person who is not ordinarily resident in India on a deposit made on or after the 1-4-2005, in an Offshore Banking Unit referred in section 2(u) of the Special Economic Zones Act, 2005 is exempt.
7. Section 10(34)
Any income by way of dividend referred to in section 115-O received by non-resident is exempt.
8. Section 10(23D)
Any income received in respect of the units of a Mutual Fund specified under this section.
9. Section 10(38)
Any income by way of long-term capital gains on sale of equity shares on a recognized stock exchange or on repurchase of units of equity oriented funds on which Security Transaction Tax (STT) is paid is exempt.
10. Section 10(48)
Any income earned in India from the sale of crude oil by a foreign company is exempt, provided the following conditions are satisfied:
4. TAX RATE APPLICABLE ON INVESTMENT INCOME OF NON RESIDENT
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, he may apply the rates prescribed under that DTAA, if beneficial, without any surcharge and education cess.
1. Section 115A – Income tax payable on income derived by non-resident by way of:
i. Dividend other than dividends referred to in section 115-O – 20% subject to applicable surcharge & education cess;
ii. Interest received from Government or an Indian concern on monies borrowed or debt incurred in foreign currency – 20% subject to applicable surcharge & education cess;
iii. Interest received from a notified Infrastructure Debt Fund referred to in section 10(47) – 5% subject to applicable surcharge & education cess;
iv. Interest of the nature and extent referred to in section 194LC or interest of the nature and extent referred to in section 194LD or distributed income being interest referred to in sub-section (2) of section 194LBA – 5% subject to applicable surcharge & education cess;
v. Income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under section 10(23D) or of the Unit Trust of India – 20% subject to applicable surcharge & education cess.
2. Section 115AB –
Tax on overseas financial organization (approved by SEBI) in respect of income by way of long-term capital gains arising on sale/ repurchase of units of mutual fund/ UTI purchased in foreign currency – 10% subject to applicable surcharge & education cess.
3. Section 115AC
Tax on non-resident in respect of interest on bonds of an Indian company issued in accordance with Central Government notification, on bonds of a public sector company sold by the Government, and purchased in foreign currency; dividends (other than dividends referred to in section 115-O) on Global Depository Receipts and long-term capital gains on sale of such bonds/Global Depository Receipts – 10% subject to applicable surcharge & education cess.
4. Section 115AD – Tax on approved Foreign Institutional Investor (FII) is as follows:
5. Section 115BBA –
Income of non-resident sportsmen (who is not citizen of India) or sports associations or institutions, by way of participation in India in any game other than section 115BB or sports; or advertisement; or contribution of articles in newspapers, magazines or journals – 20% subject to applicable surcharge and education cess
6. Section 115BB –
Winning from lotteries, crossword puzzles, or race including horse race (not being income from activity of owning and maintaining race horse) or card game and other game of any sort or from gambling or betting of any form or nature – 30% subject to applicable surcharge & education cess
7. Section 115BBD –
Where an Indian Company receives dividend from a foreign company (where Indian company holds 26% or more stake) – 15% subject to applicable surcharge & education cess
5. SALARY INCOME OF NON-RESIDENT
Any remuneration received by foreign citizen as an employee of a foreign enterprise for services rendered by him in India is exempt, provided the following conditions are fulfilled—
a. the foreign enterprise is not engaged in any trade or business in India;
b. his stay in India does not exceed in the aggregate a period of 90 days in such previous year; and
c. such remuneration is not liable to be deducted from the income of the employer chargeable under the Income-tax Act
6. BUSINESS INCOME OF NON-RESIDENT
1. Section 44B –
Income from business of operation of ship taxable at 7.5% of the gross receipts from such business
2. Section 44BB –
Income from business of providing services or facilities in connection with plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils including petroleum and natural gas is taxable at 10% of gross receipt from such business, unless the assessee claims lower profits and gains by maintaining proper books of account and other documents, get the same audited and file the audit report along with return of income
3. Section 44BBA –
Income from business of operation of aircraft taxable at 5% of the gross receipts from such business
4. Section 44BBB –
Income of foreign company from business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government is chargeable at 10% of the gross receipts from such business, unless the assessee claims lower profits and gains by maintaining proper books of account and other documents, get the same audited and file the audit report along with return of income. Such income tax return will be subject to scrutiny assessment