Income-tax Act contains special provision for taxability of a non-resident person, including a foreign company. A few benefits are extended to non-residents by these provisions, inter-alia, global income of a non-resident is not taxable in India, various interest income are not taxable in India and so forth. This document gives a brief introduction to those provisions which provides certain benefits to a non-resident.
Section 2(30) defines non-resident as a person who is not a resident. Section 6 lays down the test of residency for different taxpayers as under:
An individual is said to be non-resident in India if he is not a resident in India. An individual shall be deemed to be resident in India if he satisfies any of the following conditions:
2. If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
a) If an Indian citizen leaves India during the previous year for the purpose of employment outside India;
b) If an Indian citizen leaves India during the previous year as a member of the crew of an Indian ship; or
c) If an Indian citizen or a person of Indian origin comes on a visit to India during the previous year.
[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]
With effect from Assessment Year 2015-16, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.
A partnership firm is treated as non-resident in India if control and management of its affairs are situated wholly outside India.
An Indian company is always resident in India. A foreign company is treated as resident if, during the previous year, control and management of its affairs is situated wholly in India. In other words, a foreign company is treated as non-resident if control and management of its affairs is situated wholly or partly outside India.
With effect from Assessment Year 2017-18, a company is said to be resident in India in any previous year, if:
For this purpose, the “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.
As per Section 5 of the Income-tax Act, 1961, unlike a resident person who is liable to pay tax on his global income, a non-resident shall be liable to tax in India in respect of following incomes only:
As per section 9(1)(i), any income accruing or arising, whether directly or indirectly, through transfer of a capital asset situated in India shall be deemed to accrue or arise in India.
The Finance Act, 2012 inserted Explanation 5 to section 9(1)(i) w.e.f. 01.04.1962 to clarify that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India, shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.
However, The Finance Act, 2017 inserted proviso to provide that Explanation 5 shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015.
A new Explanation 6 is inserted to section 9(1)(i) by the Finance Act, 2015 w.e.f 01.04.2016 to define the term "substantially". It provides that share or interest in a company or entity registered or incorporated outside India shall be deemed to derive its value substantially from the assets located in India, if, on the specified date, the value of such assets:
(ii) represents at least 50% of the value of all the assets owned by the company or entity, as the case may be.
Further, a new Explanation 7 is inserted to provide that no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India, referred to in the Explanation 5:
(i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of such company or entity; or
(ii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds any right in, or in relation to, such company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India, nor holds such percentage of voting power or share capital or interest in such company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India;
In a case where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity referred to in the Explanation 5, are not located in India, the income of the non-resident transferor, from transfer outside India of a share of, or interest in, such company or entity, deemed to accrue or arise in India under this clause, shall be only such part of the income as is reasonably attributable to assets located in India and determined in such manner as may be prescribed.
A new Section 9A is inserted by the Finance Act, 2015. It provides that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund (subject to certain conditions).
It further provides that an eligible investment fund shall not be said to be resident in India for the purpose of section 6 merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.
(Refer Section 9A for meaning of 'Eligible Investment Fund', 'Eligible Fund Manager' and other conditions).
Section 206AA provides that where the taxpayer does not furnish its PAN to the personresponsible for withholding of tax, tax shall be deducted at source at higher of the following rates:
However, the provisions of section 206AA shall not apply to a non-resident, not being a company, or to a foreign company, in respect of—
Section 115JH is inserted to provide relaxation to foreign companies from certain compliances if such company is held to be resident in India for the first time. It is provided that provisions relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, advance tax, TDS or transfer pricing shall apply to said company subject to such modifications or exceptions, as may be prescribed by the Government.
Rate of MAT shall be 9% in case of unit located in International Financial Services Center ('IFSC'), provided such unit derives its income solely in convertible foreign exchange. A unit located in IFSC, deriving income solely in convertible foreign exchange, shall not be subject to dividend distribution tax on declaration of dividend out of its current income.
No Securities Transaction Tax (STT) and Commodities transaction tax would be levied on transactions undertaken on a recognised stock exchange located in IFSC if consideration is paid or payable in foreign currency.
Long-term capital gain arising from transaction in foreign currency on recognized stock exchange located in IFSC would be exempt even if STT is not paid.
a) "Foreign Exchange Asset" means any "specified asset" which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange [Section 115C(c)].
c) 'Non-resident Indian' means an individual, being citizen of India or a person of Indian origin who is not a "resident" [Section 115(e)].
With effect from assessment year 2016-17, in respect of a foreign company, capital gains arising from transfer of securities, interest, royalty and fees for technical services accruing or arising to such foreign company shall be excluded from book profit for the purpose of charging MAT if income-tax payable by foreign company on such income is at rate less than 15%. Further, expenditure, if any, debited to the profit loss account, in respect of such income shall also be added back to the book profit for the purpose of computation of MAT.
However, provisions of section 115JB shall not be applicable with effect from April 1, 2001 to a foreign company, if—
(i) the assessee is a resident of a country or a specified territory with which India has an Double Taxation Avoidance Agreement('DTAA) or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India; or
(ii) the assessee is a resident of a country with which India does not have an DTAA and the assessee is not required to seek registration under any law for the time being in force relating to companies.