1. TEST OF RESIDENCE

A. Individuals

a. An Individual is regarded as ‘Resident’ of India if:

1. He stays in India for 182 days or more during a previous year;

OR

2.  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 (i.e., even though an Individual is in India for 365 days or more during preceding 4 previous years).

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.

b. An Individual is regarded as ‘Resident but not ordinarily Resident’ if:

1. He is a non-resident in India in 9 out of 10 previous year preceding the previous year;

OR

2. He has stayed in India for 729 days or less during 7 year 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.

B. HUF/FIRM/AOP

1. Resident - They are regarded as resident, even if part 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 any one of the conditions as mentioned in A (b) above]

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

C .Company

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

2. TAX INCIDENCE

1. Resident & Ordinarily Resident – Global Income is taxable.

2.  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.

3. Non-resident – Only income earned/received in India and income deemed to accrue or arise in India is taxable.

3. 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.

A. Exempt Investment Income

Following types of investment income are exempted:

1. Interest on NRE account paid or credited to individual non-resident Indians who are permitted by RBI to maintain such account. [Section 10(4)(ii)] (Including person who may be ‘Resident’ in India as per Income Tax Act, 1961 (‘the Act’), but are resident outside India under FEMA)

2. Interest, premium on redemption or any other payment on other securities, bonds, annuity certificates, 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 the Act.

3.  Interest payable by Government or a local authority on moneys borrowed from sources outside India before the 1-6-2001 is exempt. [Section 10(15)(iv)(a)]

4. Interest payable on moneys borrowed by an industrial undertaking in India prior to 1-6-2001 to a foreign country in respect of purchase of raw materials, components or plant and machinery and approved by the
   Central Government prior to 1-6-2001. [Section 10(15)(iv)(c)]

5.  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. [Section 10(15)(iv)(fa)]

6.  Any interest received by a non-resident or a person who is not ordinarily resident in India on a deposit made on or after 1-4-2005, in an Offshore Banking Unit referred in section 2(u) of the Special Economic Zones Act, 2005 is exempt u/s 10(15)(viii).

7. Any income by way of dividend referred to in section 115-O received by non-resident is exempt u/s 10(34). Any income received in respect of the units of a Mutual Fund specified u/s 10(23D); or from the Administrator of the specified undertaking as defined; or from the specified company is exempt u/s 10(35).

8. Any income by way of long term capital gains on sale of equity shares on a recognised stock exchange or on re-purchase of units of equity oriented funds on which Security Transaction Tax (STT) is paid is exempt
   u/s 10(38).

9. Any income arising on account of sale of crude oil in India by a foreign company shall be exempt u/s. 10(48). This exemption is subject to following conditions:

• The income earned by the foreign company is pursuant to an agreement with the Central Government or after taking approval of the Central Government.

• The foreign company and the agreement should be notified by the Central Government.

• The foreign company should only be engaged in the activity of receipt of such income in India.

B. Special Tax Rate and Surcharge applicable on Investment Income of non-resident

(Reader may consider provisions of Sec. 206AA – enumerated at Point No. 13 hereunder)

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, he may apply the rates prescribed under that DTAA, if beneficial without any surcharge and education cess. This position has been upheld in the case of Sunil V. Motiani vs ITO (ITA No. 276/Mum/2012).

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 and education cess;

iii. Interest received from a notified Infrastructure Debt Fund – 5% subject to applicable surcharge and education cess;

iv. Interest income payable by a specified company to a non-resident is liable to deduct income-tax @ 5%, subject to the following conditions:

• The interest should be in respect of monies borrowed by it between 1st July, 2012 and 1st July, 2015.

• The money should be borrowed from a source outside India under a loan agreement approved by the Central Government.

• The interest rate should not be more than the approved interest rate.

Specified Company means an Indian Company (Sec. 194LC)

v. Interest paid to a Foreign Institutional Investor or Qualified Financial Investor on or after June 1, 2013 but before June 1, 2015 on account of investment made by them in Rupee dominated bonds of Indian currency or Government securities, will be liable to tax at a concessional rate of 5%. (Sec 194 LD)

vi. 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 is taxable at the rate of 20% subject to applicable surcharge and education cess.
 

2. Tax on overseas financial organisation (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; is 10% subject to applicable surcharge & education cess. [Section 115AB]

3. 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 is 10% subject to applicable surcharge and education cess. [Section 115AC]

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

   • Income by way of interest on securities other than 115AB – 20%

   • Short term capital gain in sale of other securities – 30%

   • Short term capital gain on sale of listed shares with STT, units – 15%

   • Long term capital gain on sale of other securities – 10%

   • Long term capital gain on sale of listed shares with STT, units – N I L [Section 115AD]

Education cess

Education Cess of 3% is split as 1% Secondary & 2% Higher education cess

Effective rate of tax

C. 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 115BB or sports; or advertisement; or contribution of articles in newspapers, magazines or journals, is chargeable to tax @ 10% subject to applicable surcharge and education cess. [Section 115BBA]

D. Income of Non-Resident entertainer (who is not citizen of India) such as musicians, radio, television or theatre artists arising from performance in India, is chargeable to tax @ 10% subject to applicable surcharge and education cess. [Section 115BBA]

E. Where an Indian company receives dividend from a foreign company (where Indian company holds 26% or more stake), such dividend shall be chargeable to tax @ 15%. This benefit is extended for only 1 year i.e. AY 2014-15. [Section 115BBD]

4. SALARY INCOME OF NON-RESIDENT DURING SHORT STAY IN INDIA

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—

1. the foreign enterprise is not engaged in any trade or business in India;

2. his stay in India does not exceed in the aggregate a period of 90 days in such previous year; and

3. such remuneration is not liable to be deducted from the income of the employer chargeable under the Act. [Section 10(6)(vi)]

5. BUSINESS INCOME OF NON-RESIDENT

1. Income from business of operation of ship taxable
   at 7.5% of the gross receipts from such business. [Section 44B]

2. Income from business of providing services or facilities in connection with or supplying 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, gets the same audited and file the audit report along with return of income. [Section 44BB]

3. Income from business of operation of aircraft taxable
   at 5% of the gross receipts from such business. [Section 44BBA]

4. 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 [Section 44BBB]

5. In any other case, for computing the business income of non-resident, expenditure in the nature of head office expenses is allowable at least of the:

1. Up to 5% of the adjusted income as specified in section; or

2. Actual expenditure attributable to business in India. [Section 44C]

6. INDIRECT TRANSFER OF SHARES

Section 9(1)(i) has been amended vide Finance Act, 2012 in an attempt to expand the Indian taxing jurisdiction by including indirect transfer of domestic company’s shares/controlling interest by non-residents. To achieve this objective, section 2(14) has been amended widening the scope of the term ‘property’ to include the right of management or control in relation to an Indian company, thereby including ‘transfer of controlling interest’ under the term ‘capital asset’. Similarly, section 2(47) has been amended to include indirect transfer of shares even if rights or interest in such shares are effected and dependent upon transfer of shares of a foreign company.

7. TAXATION OF ROYALTY & FEES FOR TECHNICAL SERVICES (FTS) RECEIVED BY NON-RESIDENTS

(Reader may consider provisions of Sec. 206AA – enumerated at Point No. 13 hereunder)

1. Royalties and fees for technical services received by non-residents and foreign companies (provided income is not attributable to a permanent establishment in India) from an Indian concern or the Government are taxed at an uniform increased rate of 25%. The date of agreement under which such income is received will henceforth be irrelevant. Sec. 115A(1)(b)
   Section 9(1)(vi) of the Act defines the taxability of royalty income in India and had defined royalty to include transfer of all or any rights (including the granting of licence) in respect of patent, invention, model, design and secret formula or process or trademark or similar property. Vide Finance Act, 2012 three clarificatory Explanations have been inserted with effect from June 1, 1976 as under:
   Explanation 4 – clarifies that the transfer of use or right to use a computer software is included in the transfer of right, property or information used, irrespective of the medium through which the right is transferred.
   Explanation 5 – clarifies that ‘royalty’ includes consideration in respect of any right, property or information irrespective of whether:

• The payer has the possession or control of the right.

• The payer uses the right directly.

• The right or property is located in India.

Explanation 6 – clarifies that ‘process’ includes transmission by satellite, cable, optic fibre, or other similar technology.

The above amendments were made to clarify the intention of the Revenue for taxing the payments made for computer software as Royalty and also to characterize the payments as Royalty where customer uses equipment (or IPR) without having control over the same. Also the scope of the term ‘process’ is considerably expanded by including specific reference to items referred in Explanation 6.

Non-resident earning income in the nature of Royalty & FTS is required to file Return of Income u/s. 139(1). The relaxation of not filing of Return of Income is available only in respect of Dividend Income (referred to in Sec. 115-O) and Interest Income on which tax has been deducted. [Sec. 115A(5)]
 

2. Royalties and fees for technical services received by non-resident (not being company) or a foreign company from an Indian concern or the Government in pursuance of agreement entered after 31-3-2003, if the non-resident has a Permanent Establishment in India or professional services — tax at applicable rate of net income. [Section 44DA]

3.  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 that Government for providing services in connection with security of India is exempt. [Section 10(6C)]

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

1. For the purpose of computation of business income, actual cost of any asset brought into India by non-resident would be computed as actual cost of acquisition to the non-resident as reduced by the notional depreciation as provided in the Act from the date of its acquisition as if the asset has been used in India. [Section 43 Expl. 11]

2. 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. [Section 43A]

9. DOUBLE TAXATION RELIEF – SECTION 90/90A

All provisions discussed above are subject to DTAA entered into with various countries or with any specified association in a specified territory outside India. The provision of the relevant tax treaty or domestic law provision whichever is beneficial to the tax payer would be applicable.

The Finance Bill, 2013 proposed a stipulation that submission of TRC by a non-resident would be a "necessary but not sufficient" condition for claiming Tax Treaty benefits. This stipulation of TRC being a necessary but not sufficient condition, as introduced in the original Bill, has been deleted in the revised Bill.

The revised Bill has also deleted the requirement of TRC to contain the prescribed particulars, as introduced by the Finance Act, 2012. However, a new provision has been inserted which provides that the non-resident taxpayer claiming Treaty relief shall be required to provide such other documents and information, ‘as may be prescribed’. Similar amendments have been introduced in the provisions of section 90A of the Act as well.

10. SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAIN ARISING ON SHARES & DEBENTURES OF INDIAN COMPANIES

First proviso to section 48 provides that while computing capital gain/loss, if any, on sale of shares or debentures purchased by a non-resident in foreign currency, the sale proceeds, expenditure on transfer and cost of acquisition of such shares or debentures must be converted in the same currency in which the original investment was made. Resultant capital gains/loss would then be reconverted into rupee to arrive at taxable capital
gain/loss. The benefit of indexation will not be available in such cases.

11. SPECIAL PROVISIONS FOR NRIs – CHAPTER XIIA

A. Section 115C

1. "Non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a "resident". A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.

2. "Investment Income" means any income derived (other than dividends referred to in section 115-O) from a foreign exchange asset.

3. "Foreign Exchange Asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to, in convertible foreign exchange.

4. "Specified asset" means any of the following assets, namely:—

• shares in 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).

B. Section 115D & Sections 115E – Computation of Income

The above rates are subject to applicable surcharge and education cess

C. Section 115F – Exemption of long term capital gains

Capital gain arise from transfer of foreign exchange asset, is exempt from tax if the following conditions are fulfilled:

1. The asset transferred must be a long term capital asset;

2. Net consideration must be invested in certain specified assets [Ref. — Para 12(A)(iv)];

3. Investment to be made within 6 months of transfer;

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

5. New asset must be held for at least three years.

D. Section 115G – Option not to file income tax return

NRI need not file an income tax return if –

1. his total income consists only of investment
   income or income by way of long term capital gains or both; and

2. TDS has been deducted from such income as per the provisions of the Act.

E. Section 115H – Continuation of benefit 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. The benefit shall continue to apply to him in relation to such income until the transfer or conversion into money of such asset. This benefit does not apply to dividend income from shares, however, this doesn’t have any impact, since dividend (with DDT) is exempt.

F. Section 115I – NRI may opt out of Chapter XII A

A non-resident Indian may elect not to be governed by the provisions of Chapter XIIA for any assessment year by furnishing a written declaration to Assessing Officer with his return of income. If he does so, his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act.

12. MANDATORY QUOTING OF PAN BY NON-RESIDENT TO AVOID TAX WITHHOLDING AT HIGHER RATE

The Finance Act, 2009 has introduced a new section 206AA in the Act, making it mandatory for payers from India to withhold tax at a higher rate if the payee (including Non-resident) does not provide PAN. Condition of mandatory quoting of PAN if tax withholding is to be done at normal (prescribed) rate has become effective from April 1, 2010.

Provisions of Mandatory Requirement of PAN as per Section 206AA are as follows:

• The payee should furnish its PAN to the payer, failing which the payer would be liable to withhold tax at the higher of following rates –

1. at the rate specified in the relevant provision of this Act; or

2. at the rate or rates in force; or

3. at the rate of 20%

• The Revenue Officers are prohibited from issuing any certificate for NIL withholding or lower withholding of taxes if the application filed u/s 197 for this purpose does not contain the PAN of the payee.

• Declaration furnished u/s 197A shall not be valid unless the person furnishes his PAN in such declaration.

• The PAN of the payee must be referred in all correspondence, bills, vouchers and other documents exchanged between the parties.

Effective from April 1, 2010, a higher rate of withholding tax would apply if tax is deductible and the payees do not furnish their PAN, even if a normal (prescribed) rate is otherwise applicable as per the Act or the Tax Treaty. Taking a conservative view, this new provision therefore, may effectively override the rates prescribed under the Tax Treaties in cases where PAN of Non-resident is not available.

It is pertinent to note that when the payment is in the nature of royalty or fees for technical services, such payment is to
be taxed at the rate of 25% as against 20% specified in this section.

13. DISCLOSURE BY RESIDENT INDIAN OF OVERSEAS ASSETS & AUTHORITY TO SIGN ANY OVERSEAS ACCOUNT

Resident Indian having overseas assets or having an authority to sign any overseas account will have to disclose such facts in Return of Income. The provision will also apply in a situation where Resident is otherwise not required to file return of income, however, in the situation referred above, it will be mandatory for such Resident Indian to file Return of Income.

The format prescribed for disclosing above particulars is as under:

1. Details of foreign bank accounts

2. Details of financial interest in any entity

3. Details of immovable property

4. Details of any other asset

5. Details of any account in which you have signing authority (other than those mentioned in A to D)