Tax Speak: Taxability guidelines for capital positive aspects of non-residents
By Neha Malhotra
The applicability of Indian tax legal guidelines is predicated on the residential standing of an individual fairly than on citizenship. In case of a person assessee, residential standing is adjudged based mostly on his bodily presence in India. Whereas a resident is taxed on his international revenue in India, a non-resident is taxed solely on revenue accrued in India.
Switch of a capital asset
The switch of a capital asset located in India instigates taxation in India. Nevertheless, taxation is topic to reduction obtainable beneath the provisions of Double Taxation Avoidance Agreements (DTAA) between India and the nation of residence of the non-resident.
Tax incidence beneath the pinnacle “Capital Good points” hinges on the kind of asset and holding interval. A ‘capital asset’ means property of any variety held by a taxpayer and consists of shares or securities in any Indian firm. Nevertheless, private results, stock-in-trade, consumable shops or uncooked supplies held for the aim of enterprise or occupation, and so on., are excluded from the scope. Sale, trade, relinquishment of a capital asset or extinguishment of rights, connotes ‘switch’ chargeable to tax in a monetary 12 months.
Classification of capital positive aspects
Lengthy-term capital belongings are these held for over 36 months previous the date of switch. Immovable property or unlisted shares of an Indian firm are categorized as long-term capital belongings if they’re held for greater than 24 months, else the identical are handled as brief time period. Listed fairness shares or models of equity-oriented funds are categorized as long-term capital belongings provided that they’re held for greater than 12 months.
To compute capital positive aspects on switch of capital asset, one has to deduct price of acquisition, price of enchancment and bills (incurred wholly and completely in reference to the switch) from the sale consideration. The resultant capital positive aspects are both short-term or long-term relying on the interval of holding. Price of acquisition is listed in case of long-term capital positive aspects (LTCG) to account for inflation over time.
For computation of capital positive aspects on sale of shares or debentures of an Indian firm, non-residents are permitted to transform price of acquisition, expenditure incurred in reference to switch and the sale consideration into the identical international forex as was expended to buy the identical. The resultant capital positive aspects are then reconverted into Indian forex. This technique has been prescribed to counterbalance the impact of international trade fluctuations. Nevertheless, the advantage of indexation isn’t accorded to non-residents on this case.
Prescribed tax charges
LTCG are taxed at 20% (plus relevant surcharge and cess). Nevertheless, positive aspects on switch of listed shares or models of equity-oriented mutual funds are taxed at 10% (with out indexation or adjustment of foreign exchange fluctuation), if such positive aspects are over Rs 1 lakh in a monetary 12 months and Securities Transaction Tax (STT) has been paid. Quick-term capital positive aspects (STCG) on sale of listed fairness or models of equity-oriented mutual funds, on which STT has been paid, are taxed at 15%. STCG on switch of different belongings are taxable at relevant tax charges for people and at 40% in case of non-resident firms.
Switch of capital positive aspects to and by a non-resident might entail sure authorized compliances. Whereas the resident transferees are required to deduct and deposit tax at supply to the federal government, non-resident transferors need to file return of revenue disclosing the particulars of switch and the resultant capital positive aspects. Non-compliance of statutory obligations might have penal penalties.
The author is director, Nangia Andersen LLP. Inputs from Vasudha Arora
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