A look at what constitutes as Income on Indian soil and what is not from the perspective of the IT department. The IT department defines certain incomes as Accruing or Arising in India. This is the basis of calculating your income and income tax. Let’s know more. The IT department says that for any company or individual (resident or non-resident) who also has business in geographical locations outside India, only the part of income which can be reasonably attributed to have been earned in operations happening in India will be considered for calculation of Income tax.
There arises a question of who/what is a Resident of India and who/what is not a resident of India. The IT department has defined these entities. An Individual is defined as a resident in India in the previous year if he/she satisfies one of the following conditions:
The IT department also states very clearly that if a person is deemed resident for one source of income, then, he will be counted as resident for all incomes in that particular year. A person is said to be not ordinarily resident in India if that person satisfies any one of the following criteria:-
Now that we have suitably understood who is defined as a Resident Indian for the purposes of Income tax, let’s look at which of their income is deemed Indian.
The following are considered to be income accrued in India. Any income which is gained from or through any business connection in India. This could be directly or indirectly. Incomes which are received from a property which is situated inside Indian borders. Through or from any source based in India and from the sale of a capital asset inside India. Thus what the IT department says is that if they can clearly define that the source of the income is in India then the Income too is accrued in India. To put the above discussion into clearer terms:
1). Any salary paid in India is deemed to have accrued in India. Even any charges which are collected as payable for a service rendered in India is regarded as income earned in India.
2). If a government employee or citizen of India is reimbursed by the Government for rendering any service outside India then it is deemed as accrued in India.
3). Any dividend which is paid by an Indian company outside India to a resident as defined earlier will be considered as an income earned in India.
4). Interest payable by the government is considered as accrued in India. This would apply for all kinds of government securities and saving instruments like bonds.
5). Any interest received from a resident except if that person has borrowed money from you to pursue business activities outside India. The logic behind this could be that this would ensure positive cash flow into India.
6). If the interest is paid by a non-resident to you then it will be added to your income except if that person has used the money borrowed from you to use for business activities in India. The logic behind this would be to boost investments in India.
7). The same concepts of point 4, 5 and 6 are applicable for any income generated from Royalties or copyrights.
8). For any income from fees for technical services provided the IT department uses the yardsticks as mentioned in points 4, 5 and 6. Although at a cursory glance some of the ideas discussed above might sound to be the stuff that our Auditor/Financial Planner should be concerned with and not us, it is imperative that we understand the philosophy behind them so that we are more in control of our income tax assessments. With the increasing benefits of technology the tax man is becoming more and more competent in keeping track of your activities vis-à-vis your income tax implications. Thus it is highly advisable that we are very clearly aware of all the rules and regulation and ensure 100% compliance. After all it’s our hard earned money that will work hard for the Indian economy.
Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.
(Republished with Amendments by Team Taxguru)