presentation by ca. sudha g. bhushan
TRANSCRIPT
Half day Seminar on Provisions relating to NRI in FEMA and Income Tax Act, 1961 and
Professional opportunities under FEMAOrganised by Nasik Branch of WIRC,
Institute of Chartered Accountants of India
Presentation by CA. Sudha G. BhushanAssociate Director – International Transaction Advisory Services
Taxpert Professionals09769033172 ||[email protected]
Index• Chargeability
• Under Foreign Exchange Management Act, 2000• Under Income Tax Act, 1961
• Definition of NRI• Under Foreign Exchange Management Act, 2000• Under Income Tax Act, 1961
• Residential Status• Under Foreign Exchange Management Act, 2000• Under Income Tax Act, 1961
• Bank accounts that can be maintained by NRIs
• Transactions• Acquisition of Shares and other securities • Acquisition of Immovable property• Investment in Sole proprietorship/partnership• Lending and Borrowing by NRI
• Remittance• Under Foreign Exchange Management Act, 2000• Under Income Tax Act, 1961
CHARGEABILITY
Charging Section under FEMA || Section 3
Section 3(a)
• deal in
• transfer
• any foreign exchange or foreign security
• to any person not being an authorized person;
Section 3(b)
• make any payment to
• for the credit
• of any person resident outside India in any manner;
Section 3(c)
• receive
• otherwise through an authorized person,
• any payment
• by order or on behalf
• of any person resident outside India in any manner.
Section 3(d)
• enter into any financial transaction in India
• as consideration for
• or in association with
• acquisition
• or creation or
• transfer of
• a right to acquire,
• any asset outside India by any person.
Save as otherwise provided in this Act, rules or regulations made there under, or with the general or special permission of the Reserve Bank, no person shall-
Deeming Provision under Section 3(c):
where any person in, or resident in, India
receives any payment
by order or on behalf of any person resident outside India
through any other person (including an authorized person)
without a corresponding inward remittance from any place outside India,
then, such person shall be deemed to have received such payment otherwise than through an authorized person;
Section 3(d) "financial transaction" is very broadly defined to mean:
• making any payment to of any person
• making any payment for the credit of any person,
• receiving any payment for any person,
• receiving any payment by order or on behalf of any person,
• or drawing, issuing or negotiating any bill of exchange or promissory note,
• or transferring any security or
• acknowledging any debt.”
Section 3 || Charging Section
• A, an NRI, has property in UK and he wants to transfer the same to B, a Resident,and B wants to make the payment of same to the parents of A in India. Althoughthere is payment from Resident (B) to Resident (Parent of A in India). Can this bedone?
• If A is a person resident in India and is relative of B, where B is an NRI. B enteredinto general power of attorney with A. A sold the land of B to XYZ LTD, a companyincorporated in India. B request A to receive the sale consideration of sale of landfrom XYZ LTD. XYZ LTD makes the payment to A on the instruction of and for thecredit of B. A receives the sale consideration of sale of land by B in India.
• A, is resident. B is Non resident. A receives the money on behalf of B. C has to payto B. Instead of B. C pays to A through Bank. A receives the payment on behalf of B.Whether doable?
• A, a resident has to receive payment towards export from Q, non resident. InsteadQ ask its subsidiary in India to make the payment. There is no inward remittancefrom outside India
Section 3 || Your thoughts…
Foreign Exchange
Transaction
Current Account
Transactions
Capital Account
Transactions
Transactions under FEMA
Current Account Transactions (CAT)
As per s 2(j) of FEMA:
“Current Account Transactions” means a transactions otherthan a capital account transactions and without prejudice tothe generality of the foregoing such transactions includes:
(i) Payments due in connection with foreign trade, othercurrent business, services, and short-term banking and creditfacilities in the ordinary course of business,
(ii)Payments due as interest on loans and as net income frominvestments,
(iii)Remittances for living expenses of parents, spouse andchildren residing abroad, and
(iv)Expenses in connection with foreign travel, education andmedical care of parents, spouse and children”
Other than Capital Account
Transactions
without prejudice to the generality of the foregoing
includes
Current Account Transactions (CAT)
1)Payment due in connection with a) Foreign tradeb)Other current businessc) Servicesd)Short-term banking facilitiese)Credit facilities in ordinary course of business
2)Payments due as –a) Interest on loans; andb)Net income from investments
3)Remittances for living expenses of parent, spouse and children residing abroad;
4)Expenses in connection with –a) Foreign travelb)Educationc) Medical care of parents, spouse and children
Current Account Transactions includes
Section 5
“Any person may sell or draw foreign exchange to orfrom an authorized person, if such sale or drawal is acurrent account transaction:
Provided that the Central Government may, in publicinterest and in consultation with the Reserve Bank,impose such reasonable restrictions for currentaccount transactions as may be prescribed.”
In exercise of the power conferred under ss 5 and 46of FEMA, the Central Government in consultationwith the Reserve Bank of India (RBI) has framedForeign Exchange Management (Current AccountTransactions) Rules, 2000, as notified by theGovernment of India vide Notification No. G.S.R. 381(E) dated 3 May 2000 (Rules). It has seven Rules.
Allow ability
Rule 3 : Prohibition on drawal of Foreign Exchange||Schedule I specifies certain categories of transactions which areexpressly prohibited.
Rule 4 : Prior approval of Government of India for drawal of Foreign Exchange || Schedule II mentions thosetransactions which are permitted by securing the approval from the Ministry/Department of the Government of Indiaas specified therein.
Rule 5:Prior approval of Reserve Bank for drawal of Foreign Exchange || Schedule III mentions those transactionsfor which prior approval of the RBI is required if the amount exceeds the specified limits. The release of foreignexchange up to the threshold ceilings specified in Schedule III is delegated to the authorised dealer banks.
Drawal Of Foreign Exchange : RULE 2 :
The scope of definition of Drawal is very vast as it not only covers the drawal by foreign exchange from an authorised person but it includes all other ways which has the effect of creating foreign exchange liability. Drawal as defined basically consists of the following
a) drawal of foreign exchange from an authorised person andb) includes opening of letter of credit or c) use of International credit card ord) International Debt Card or ATM card ore) any other thing by whatever name called which has the effect of creating foreign exchange liability
Foreign Exchange Management (Current Account Transactions) Rules, 2000
Ru
le 3
Sch
edu
le 1 • 1.Remittance out of lottery winnings.
• 2. Remittance of income from racing/riding, etc., or any other hobby.
• 3. Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etc.
• 4. Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.
• 5. Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
• 6. Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco.
• 7. Payment related to "Call Back Services" of telephones.
• 8. Remittance of interest income on funds held in Non-resident Special Rupee Scheme a/c.
Prohibited Transactions
Schedules of CAT Rules, 2000 || Rule 3
Purpose of Remittance Ministry / Department of Govt. of India whose approval is required
1. Cultural Tours Ministry of Human Resources Development, (Department of Education and Culture)
2. Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding USD 10,000) by a State Government and its Public Sector
Undertakings
Ministry of Finance, (Department of Economic Affairs)
3. Remittance of freight of vessel chartered by a PSU Ministry of Surface Transport, (Chartering Wing)
4. Payment of import through ocean transport by a Govt. Department or a PSU on c.i.f. basis (i.e. other than f.o.b. and f.a.s. basis)
Ministry of Surface Transport, (Chartering Wing)
5. Multi-modal transport operators making remittance to their agents abroad
Registration Certificate from the Director General of Shipping
6. Remittance of hiring charges of transponders by(a)TVChannels (b) Internet Service providers
Ministry of Information and BroadcastingMinistry of Communication and Information Technology
7. Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping
Ministry of Surface Transport (Director General of Shipping)
8. Omitted
9. Remittance of prize money/sponsorship of sports activity abroad by a person other than International / National / State Level sports bodies, if
the amount involved exceeds USD 100,000.
Ministry of Human Resources Development (Department of Youth Affairs and Sports)
10. Omitted
11. Remittance for membership of P&I Club Ministry of Finance (Insurance Division)
Ru
le 4
Sch
edu
le II
Transactions which require approval from Central Government
Schedules of CAT Rules, 2000 || Rule 4
Old
Ru
le 5
Prior approval of Reserve Bank.
5. No person shall draw foreign exchange for a transaction included in the Schedule III without prior approval of the Reserve Bank :
Provided that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account of the remitter.
New
Ru
le 5
“5. Prior approval of Reserve Bank. —Every drawal of foreign exchange for transactions included in Schedule III shall be governed as provided therein:
Provided that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account of the remitter.”
Schedules of CAT Rules, 2000 || Rule 5
For Individuals
Individuals can avail of foreign exchange facility for the following purposes withinthe limit of USD 2,50,000 only. Any additional remittance in excess of the said limitfor the following purposes shall require prior approval of the Reserve Bank ofIndia.
• Private visits to any country (except Nepal and Bhutan)• Gift or donation• Going abroad for employment• Emigration• Maintenance of close relatives abroad• Travel for business, or attending a conference or specialised training or for
meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up.
• Expenses in connection with medical treatment abroad• Studies abroad• Any other current account transaction
FAQ on Forex Facilities “Any other current account transaction” as given at item no. (ix) of Rules is to cover any other current account transactions which were available to individuals in the erstwhile Schedule III to FEM (CAT) Rules, 2000 dated May 3, 2000, and which do not appear in Para 1 to Schedule III to FEM (CAT) Amendment Rules, 2015.
Schedules of CAT Rules, 2000
For Individuals For persons other than individualThe following remittances by persons other than individuals shall require prior approval of theReserve Bank of India.
(i) Donations exceeding one per cent. of their foreign exchange earnings duringthe previous three financial years or USD 5,000,000, whichever is less, for-
a) creation of Chairs in reputed educational institutes,
b) contribution to funds (not being an investment fund) promoted byeducational institutes; and
c) contribution to a technical institution or body or association in the fieldof activity of the donor Company.
(ii) Commission, per transaction, to agents abroad for sale of residential flats orcommercial plots in India exceeding USD 25,000 or five percent of the inwardremittance whichever is more.
(iii) Remittances exceeding USD 10,000,000 per project for any consultancyservices in respect of infrastructure projects and USD 1,000,000 per project, forother consultancy services procured from outside India. Where “infrastructure’shall mean as defined in explanation to para 1(iv)(A)(a) of Schedule I of FEMANotification 3/2000-RB, dated the May 3, 2000.
(iv) Remittances exceeding five per cent of investment brought into India or USD100,000 whichever is higher, by an entity in India by way of reimbursement ofpre-incorporation expenses.
The remittances for current account transactions available toresident individuals under Para 1 of Schedule III to ForeignExchange Management (Current Account Transactions)Amendment Rules, 2015 dated May 26, 2015 are subsumedin the limit of Liberalised Remittance Scheme of USD2,50,000. Release of foreign exchange exceeding USD2,50,000, requires prior permission from the RBI.
Exception to above: There is an exception to the above limitof USD 250,000 in case of expense for emigration expenses,for expenses in connection with medical treatment abroadand studies abroad wherein individual may avail of exchangefacility for an amount in excess of the limit if it is so requiredby a country of emigration, medical institute offeringtreatment or the university, respectively.
Schedules of CAT Rules, 2000 || Schedule III, Rule 5
A person other than an individual may also avail of foreign exchange facility, mutatismutandis, within the limit prescribed under the said Liberalised Remittance Scheme forthe purposes mentioned herein above.
FAQ Forex Facilities for residents
Q. 27. Whether the limit of USD 2,50,000 per financial year as mentioned in Para 1 of Schedule III of FEM (CAT)Amendment Rules, 2015 is also applicable to person other than individuals?Ans. Yes, the limit of USD 2, 50,000 is applicable to persons other than individuals (such as corporates, trusts; etc.)who wish to avail of facilities under Para 1 of Schedule III to FEM (CAT) Amendment Rules, 2015. Such entities willhave to fill up the Form A2 while remitting foreign exchange.However, all residual current account transactions undertaken by such entities are otherwise permissible withoutany specified limit as hitherto. All such residual current account transactions, irrespective of the amount, are to bedisposed off at the level of AD Category I bank, as hitherto. It is for the AD Category I bank to satisfy themselvesabout the genuineness of the transaction.
Facility or Restriction?
Schedules of CAT Rules, 2000 || Schedule III, Rule 5
Ru
le 4
•No approval of CG required if out of funds mentioned in RFC account
•No approval of CG required if out of funds mentioned in EEFC account
Ru
le 5
•No approval of RBI required if out of funds mentioned in RFC account
•No approval of CG required if out of funds mentioned in EEFC account
Exceptions to above || Remittance out of EEFC Account can not be made for Rule 4 : Remittance for membership of P&I Club. Rule 5 : (1) Gift remittance exceeding US$ 5,000 per financial year per remitter or donor other than resident individual.(2) (i) Donation exceeding US$ 5,000 per financial year per remitter or donor other than resident individual;(ii) Donations by corporate, exceeding one per cent of their foreign exchange earnings during the previous three financial years or US$ 5,000,000, whichever is less, for, -(a) creation of Chairs in reputed educational institutes;(b) to funds (not being an investment fund) promoted by educational institutes; and(c) to a technical institution or body or association in the field of activity of the donor company.3. Remittances exceeding five per cent of the investment brought into India or US$ 1,00,000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.]
Remittance out of RFC Account/EEFC Account
• Use of International Credit card while outside India: As per Rule 7 ofCAT Rule, 2000 no RBI approval is required for use of InternationalCredit Card for making payment by a person towards meetingexpense while such person is on a visit outside India.
Use of International credit card while outside India || Rule 7
Current account records the trading in goods and services in the current period.Capital Account records the movement of capital in and out the economy.
Current Account shows the net income of the country, whereas Capital Accountshows the change in the ownership of the nation’s assets.
Current Account is mainly concerned with receipts and payment of cash and non-capital items. Conversely, Capital Account is thoroughly considered the sourcesand application of capital.
The key components of current account are export and import of goods andservices, the investment the income and current transfers. On the other hand,foreign direct investment, portfolio investment and Loans by the government ofone country to the government of another country are the key components ofCapital Account.
Key difference || Current and Capital Account Transactions
As per s 2(e) of FEMA:
‘Capital account transaction’ means a transaction which altersthe assets or liabilities, including contingent liabilities, outsideIndia of persons resident in India or assets or liabilities in India ofpersons resident outside India, and includes transactionsreferred to in sub-section (3) of section 6;
Assets or liabilities of resident person
outside India;
Assets or liabilities in India of non-resident person.
including contingent liabilities
includes transactions
referred to in s 6(3)
Outside India
India
Asset and Liability
outside India
Person resident in
India
Person resident
outside India
Asset and Liability in
India
Capital Account Transactions
(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchangeto or from an authorised person for a capital account transaction.
(2) The Reserve Bank may, in consultation with the Central Government, specify—
(a) any class or classes of capital account transactions, involving debt instruments, which arepermissible;]
(b)the limit up to which foreign exchange shall be admissible for such transactions:
(c)any conditions which may be placed on such transactions;
Provided that the Reserve Bank or the Central Government shall not impose any restrictions onthe drawal of foreign exchange for payment due on account of amortisation of loans or fordepreciation of direct investments in the ordinary course of business.
(2A) The Central Government may, in consultation with the Reserve Bank, prescribe—
(a)any class or classes of capital account transactions, not involving debt instruments, which arepermissible;
(b)the limit up to which foreign exchange shall be admissible for such transactions; and
(c)any conditions which may be placed on such transactions.
Many sell or draw subject to Sub section 2
Sub Section 2 -RBI
Sub Section 2A – Central
Government
Power shifted from RBI to Central Government
Permissibility || Section 6
In exercise of the powers conferred by sub-s (2) of s 6, and sub-s (2) of s 47 of the Foreign ExchangeManagement Act, 1999, the RBI has in consultation with the Central Government made thefollowing regulations relating to capital account transactions, namely the Foreign ExchangeManagement (Permissible Capital Account Transactions) Regulations, 2000.
As per the regulations, the capital account transactions are divided into two categories:
• Transactions permissible for person resident in India specified in Schedule I; and
• Transactions permissible for person resident outside India as specified in Schedule II.
FEM(Permissible Capital Account Transactions) Regulations, 2000
FM Mr. Arun Jaitley said “Capital Account Controls is a policy, rather than a regulatory, matter. I,therefore, propose to amend, through the Finance Bill, Section-6 of FEMA to clearly provide thatcontrol on capital flows as equity will be exercised by the Government, in consultation with the RBI”
Shifting of power to specify capital
account transactions from RBI to Central Government except for debt instruments
to be notified by Central Government.
Power to make notifications,
prescribe declarations, period of repatriation, etc. will still remain with
RBI
Regulations/Notifications prescribed by the RBI so far to remain
valid unless amended
Amend Section 6 of FEMA Act, 1999 to
provide that control on capital flows as
equity will be exercised by the Government, in
consultation with the RBI.
Amendment vide Finance Act 2015
The erstwhile s 6(2) gave powers to the RBI to make regulation for various capital account transactions. In place ofRBI, powers have now been given to the Central Government under the newly inserted s 6(2A) to lay down thecapital account transactions which are permissible under the Act.
Section 6(2A) gives power to the Central Government to prescribe in consultation with the RBI,(a)any class or classes of capital account transactions, not involving debt instruments, which are permissible;
(b)the limit up to which foreign exchange shall be admissible for such transactions; and
(c)any conditions which may be placed on such transactions.
The term debt instruments have been defined in s 6(7) to mean “such instruments as may be determined by theCentral Government in consultation with the Reserve Bank”.
Amendment vide Finance Act 2015
Section Particulars Regulation made by RBI
6(3)(a) Prohibition/restriction/regulation of transfer or issue of
any foreign security by a person resident in India
FEM (Transfer or Issue of any Foreign Security) (Amendment) Regulations,2004
6(3)(b) Prohibition/restriction/regulationof transfer or issue of any security by a person residentoutside India
Foreign Exchange Management [Withdrawal of General Permission toOverseas Corporate Bodies (OCBs)] Regulations, 2003
FEM (Transfer or Issue of Security by a Person Resident outside India)Regulations, 2000
6(3)(c) Prohibition/restriction/regulationof transfer or issue of any security by any branch, officeor agency in India of a person resident outside India
FEM (Issue of Security in India by a Branch, Office or Agency of a PersonResident outside India) Regulations, 2000
6(3)(d) Prohibition/restriction/regulation of any borrowing orlending in foreign exchange
FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000 Foreign Exchange Management [Withdrawal of General Permission to
Overseas Corporate Bodies (OCBs)] Regulations, 2003
6(3)(e) Prohibition/restriction/regulation of any borrowing orlending in rupees between a person resident in Indiaand a person resident outside India
FEM (Borrowing and Lending in Rupees) Regulations, 2000 Foreign Exchange Management [Withdrawal of General Permission to
Overseas Corporate Bodies (OCBs)] Regulations, 2003
Regulations || Section 6
Section Particulars Regulation made by RBI
6(3)(f) Prohibition / restriction/regulation of deposits betweenpersons resident in India and person resident outsideIndia
FEM (Deposit) Regulations, 2016 Foreign Exchange Management (Crystallization of Inoperative Foreign
Currency Deposits) Regulations, 2014 Foreign Exchange Management [Withdrawal of General Permission to
Overseas Corporate Bodies (OCBs)] Regulations, 2003
6(3)(g) Prohibition/restriction/regulation of export, import orholding of currency or currency notes
FEM (Export and Import of Currency) Regulations, 2015
6(3)(h) Prohibition/restriction/ regulation of transfer ofimmovable property outside India (other than short-term lease) by a person resident in India
FEM (Acquisition and Transfer of Immovable Property outside India)Regulations, 2015
6(3)(i) Prohibition/restriction/regulation of acquisition ortransfer of immovable property in India (other thanshort-term lease) by a person resident outside India
FEM (Acquisition and Transfer of Immovable Property in India) Regulations,2000
6(3)(j) Prohibition/restriction/regulation of giving of aguarantee or surety
FEM (Guarantees) Regulations, 2000
Regulations || Section 6
• While Section 4 is the charging section, Section 5 outlines the scope of total income for various categories of persons depending upon their residential status
• Section 5(1) – Taxable income of residents • World wide income is taxable
• Section 5(2) – Taxable income of non residents include • Income received or deemed to be received in India
• Income which accrue or arise in India
• Income which is deemed to accrue or arise in India ( Section 9)
Charging section || Income Tax Act, 1961
Taxability
Resident
If ROR
Worldwide Income
If RNOR
Worldwide Income except
income accruing or arising
outside India ( unless
controlled from business or
profession set up in India)
Non Resident
Income received , Accrued or
arisen or deemed to be
received or accrue or arisen
In India
Section 5
5. (1) Subject to the provisions of this Act, the total income of any previous year of a personwho is a resident includes all income from whatever source derived which—(a) is received or is deemed to be received in India in such year by or on behalf of suchperson ; or(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or(c) accrues or arises to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in India within the meaning ofsub-section (6)* of section 6, the income which accrues or arises to him outside India shallnot be so included unless it is derived from a business controlled in or a profession set up inIndia.
(2) Subject to the provisions of this Act, the total income of any previous year of a personwho is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of suchperson ; or(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
The following chart highlights the tax incidence in case of different persons:
Nature of income ROR (*) RNOR (*) NR (*)
Income which accrues or arises in India Taxed Taxed Taxed
Income which is deemed to accrue or arise in India Taxed Taxed Taxed
Income which is received in India Taxed Taxed Taxed
Income which is deemed to be received in India Taxed Taxed Taxed
Income accruing outside India from a business controlled from India or from a profession set up in India
Taxed Taxed Not taxed
Income other than above (i.e. income which has no relation with India)
Taxed Not taxed Not taxed
Chargeability of Income
An income is said to be deemed to accrue or arise in India if the same is accruing or arising directly or indirectly, through
• a business connection,
• From a property in India
• From any asset or source of Income in India
• The transfer of capital assets in India situated in IndiaIt also includes any share or interest in a company or entity registered or incorporated outside India which derives its value from assets in India
• Salary
• Dividend
• Interest
• Royalty
• Fees for Technical services
Income deemed to accrue or arise in India || Section 9, ITA
• In a case where tangible property is situated in India, the income arising through orfrom such property is deemed to be income arising in India – CIT v. CurrimbhoyEbrahim & Sons Ltd.(3 ITR 395)(PC)
• Capital gains arising from the transfer of a capital asset situated in India at the time oftransfer are deemed to accrue in India, irrespective of the place where the agreement oftransfer is made or the consideration for the transfer is payable –CIT v. Assam Tea (167ITR 215), CIT v.Quantas Airways Ltd.(256 ITR 84)(Del), Triniti Corpn (295 ITR 258)(AAR)
• Indirect transfer of assets outside India having substantial value from assets located inIndia – Taxable retrospectively (Overruled Vodafone SC judgement)
• Capital gains tax will be attracted when NRI sells any capital assets situated in Indiaand accordingly, section 195 would apply on capital gains – Meena S. Patil v. ACIT(113 TTJ 863)
Income deemed to accrue or arise || Some case Laws
Salary
Salary earned in India –
Salary payable for services rendered in India; and
The rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the contract of employment
• Relevant test to decide the place of accrual of income is the place where the services are rendered
• Salary will be taxable in India on the basis of services rendered in India irrespective of Residential status of employees (except to the extent of short-stay exemption)
Dividend
• Dividend income paid to a non-resident by Indian company is deemed to accrue in India only on payment and not ondeclaration.
• This is in contradistinction to section 8 which refers to a dividend declared, distributed or paid by a company.
• Dividend income in the hands of shareholder is exempt if the dividend declared by the company is subject to dividenddistribution tax in India
Salaries and Dividend
• Payable by-
(a)the Government; or
(b)a person who is a resident, except where the interest is payable in respect ofany debt incurred, or moneys borrowed and used for the purposes of a businessor profession carried on by such person outside India or for the purposes ofmaking or earning any income from any source outside India; or
(c)a person who is a non-resident, where the interest is payable in respect of anydebts incurred, or moneys borrowed and used, for the purposes of a business orprofession carried on by such person in India or for the purposes of making orearning any income from any source in India
Interest
Taxability of Non-Resident is to be examined under the Income-tax Act, 1961vis-à-vis under the Double Taxation Avoidance Agreement (“DTAA”)
The Non-Resident can choose between the two, whichever is morebeneficial [Section 90(2)]
Tax Residency Certificate is must in order to avail Treaty benefits [Section 90(4)]
DTAA / Income Tax Act
Residential Status
For the purpose of Income-tax Act, 1961, an individual may have any one of the following residential status:
(1) Resident and ordinarily resident in India
(2) Resident but not ordinarily resident in India
(3) Non-resident
Residential Status under Income Tax Act, 1961
NO
NO
In India > or = 182 days
Individual - Residence Rule under ITA
>or =60* days in FY and > or =
365 days in preceding 4 yrs
NO
Non Resident
YESResident
R N O RYES In India for < or = 729 days in
preceding 7 years
R O R
NO
YES
YES NR in India in 9
out of 10 preceding yrs
Further Conditions
Basic Conditions
* 60 days to be substituted by 182 days:
• In the year in which a citizen of India goes abroad “for the purpose of employment”; or
• In the year in which a citizen or person of Indian origin comes on a visit in India.
A resident individual will betreated as resident andordinarily resident in Indiaduring the year if he satisfiesboth the followingconditions:1) He is resident in India forat least 2 years out of 10years immediately precedingthe relevant year.2) His stay in India is for 730days or more during 7 yearsimmediately preceding therelevant year.
Determination of Residential Status of an Individual
Clause 2(v) of FEMA, 1999 defines a ‘resident’ as follows:
i) A person residing in India for more than 182 days during the preceding Financial Year but does not include
(A) a person who has gone out of India or who stays outside India, in either case
a) for or on taking up employment outside India or
b) for carrying on outside India a business or vocation outside India or
c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period
(B) a person who has come to or stays in India in either case, otherwise than
a) for or on taking up employment in India or
b) for carrying on in India business or vocation in India, or
c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.
Residential Status under FEMA
• Mr. Vijay Agarwal leaves India on 1 December 2015 for taking up employment outsideIndia for the first time. What will be his residential status?
• Mrs. Katrina a foreign citizen of non-Indian origin sets up a proprietary concern in India on1 June 2016 for carrying on business. What will be her residential status for the financialyear 2016-2017?
• Mr. Harpreet Singh, who is staying in Dubai for more than ten years, has to come to Indiaon 1 July 2016 for medical treatment. He has not visited India during FY 2015-2016. He isplanning to return to Dubai after medical treatment is over. Doctors have advised him tostay in India up to 31 October 2017. What will be his residential status under FEMA?
Few queries on Residential Status under FEMA
Does a person become resident as soon as he comes to take up employment in India or the basic condition of 182 days still needs to bechecked? The law is quite confusing. Pl help.
The residential status of individuals is determined on the basis of the period of their stay in India.
A person residing in India for more than 182 days during the course of the preceding financial year shall be construed as resident underFEMA; however, there are exceptions to this definition,
• in case of person who has come to India or stays in India for or on taking up employment in India,
• or for carrying on in India a business or vocation in India,
• or for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period, in that case hebecomes the resident in India from the day one.
FAQ on immovable property
“Q.53. What is meant by a person resident in India?
A.53. From FEMA angle, a person resident in India means a person residing in India for more than one hundred and eighty-two days duringthe course of the preceding financial year (April-March) and who has come to or stays in India either for taking up employment, carryingon business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In otherwords, to be treated as ‘a person resident in India’, under FEMA a person has not only to satisfy the condition of the period of stay(being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of thepurpose/intention of stay.”
Misc.
• FEMA uses Preceding Financial Year under Income Tax Act it is Previous Year. Under Income Tax previous year isdefined to be financial year immediately preceding the assessment year. “ Assessment Year” as per Income Tax Actmeans the period of 12 months commencing on the 1st day of April every year.
• ‘Financial Year’ is not defined under FEMA; but in some of the FAQ by RBI, it is mentioned to be 1 April to 31 March.Therefore, referring to FAQ and by convention it is assumed to refer to 1 April to 31 March.
• Income Tax Act requires physical presence of 182 days or more, whereas FEMA requires 183 days or more.
Income Tax Act, 1961:
"that year for a period or periods amounting in all to one hundred and eighty- two days or more";
FEMA, 1999:
"a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year”
Comparison || Income Tax Act1961 and FEMA
Definition of NRI
(a) Under Foreign Direct Investment policy 2016, NRI is defined as follows:
”‘Non-Resident Indian’ (NRI) means an individual resident outside India who is a citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955.
(b) Under Foreign Exchange Management (Deposit) Regulations, 2016, vide Notification No. FEMA 5(R)/2016-RB dated April 01, 2016
'Non-Resident Indian (NRI)' means a person resident outside India who is a citizen of India.
(c) Under Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000
'Non-Resident Indian (NRI)' means a person resident outside India who is a citizen of India or is a person of Indian origin;
(d) Foreign Exchange Management (Remittance of Assets) Regulations, 2016
'Non-Resident Indian’ (NRI) shall have the same meaning assigned under the Foreign Exchange Management (Deposit) Regulations, 2016;
(e)Foreign Exchange Management (Borrowing and lending in rupees) Regulations, 2000
• "NRI shall have the same meanings as assigned to them respectively in Foreign Exchange Management (Deposits) Regulations, 2000 made by Reserve Bank under clause (f) of sub-section (3) of section 6 of the Act";
Definition of NRI under FEMA
Section 115 C (e)
"non-resident Indian" means an individual, being a citizen of India or aperson of Indian origin who is not a "resident".
Explanation.—A person shall be deemed to be of Indian origin if he, oreither of his parents or any of his grand-parents, was born in undividedIndia;
Definition of NRI under Income Tax Act, 1961
Bank Account
Governing Legislation: Foreign Exchange Management (Deposit) Regulations,2016 vide Notification No. FEMA 5(R)/2016-RB dated April 01, 2016
• Non-resident (External) Rupee Accounts (NRE Accounts) opened under the Non-rresident (External) Account Scheme, specified in Schedule 1 of the "DepositRegulations"
• Non-resident (Ordinary) Rupee Accounts (NRO Accounts) opened under the Non-resident (Ordinary) Account Scheme (NRO account) specified in Schedule 3 of the"Deposit Regulations"
• Foreign Currency Non-resident (Banks) Accounts (FCNR(B) Accounts) openedunder the Foreign Currency (Non-resident) Account Banks Scheme (FCNR-Baccount) specified in Schedule 2 of the "Deposit Regulations"
• Prior approval of RBI in certain cases: Opening of accounts by individuals/entitiesof Bangladesh/Pakistan requires prior approval of the Reserve Bank.
Bank Account under FEMA
Ch
ange
of
resi
den
tial
St
atu
s
From Non resident to Resident
NRE account becomes RFC
account
NRO becomes the regular account
FCNR(B) can continue to maturity.
Then RFC account
From Resident to non resident
Regular account becomes NRO
account
RFC Account becomes NRE
Account
The funds were remitted from the account of A and B (referred as "NRIs") asfollows:(1) In the company account towards the consideration of share purchase.(2) In the account of Mr. AG and Mrs. RG( Referred as " Residents") as loan ( notclose relative as defined under the Companies Act)(3) Other sum towards meeting the initial cost.
NRIs do not want to continue their business in India and want to remit the fundsback in their NRE Account.
Is it possible?Way out?
Case Study
Transactions
Check for allow ability
under FEMA
Check for permission
under FEMA
Check for special
provisions under FEMA
Check for taxability
under Income tax
Act
Check for exemption
under Income Tax
Act
Check for special
provisions under
Income tax Act / DTAA
Check for remittance
under Income tax
Act
Check if certificate
under section
194(3) may be helpful
Annual return under
FEMA and Income Tax
Return under IT Act
Procedure to be followed for every transaction
Investment by NRI
Bank Accounts Foreign Exchange Management (Deposit) Regulations, 2016
Investment in Immovable property Foreign Exchange Management (Acquisition and Transfer of Immovable Property India) Regulations, 2015
Investment in Share and other securities
Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000
Borrowing and lending by NRI Foreign Exchange Management (Borrowing and lending in rupees) Regulations, 2000 or Foreign Exchange Management (Borrowing and lending in Foreign Exchange) Regulations, 2000.
Capital contribution in any proprietary or partnership concern in India
Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000 vide Notification No. FEMA 24 /2000-RB dated 3rd May 2000
Remittance of Assets Foreign Exchange Management (Remittance of Assets) Regulations, 2016
Investment by Non Resident Indians and FEMA Regulations
Investment by Non Resident Indians
Provisions relating to NRI
Investment in Immovable
property
Rental income
Capital Gains
Investment in Shares
Dividend
Section 10(34)
(Dividend u/s 115O)
Not Taxable
Section 115A(1)(a)
Dividend other than 115O
20%
Capital Gain
Section 10(38)
Special Regime –Chapter XII-A
Investment in other securities
Section 10(15)(iid)
Specified NRI Bonds
Section 10(15)(i)
Section 115A(1)(a)
Section 115AC
Also Section 47
Remittance of Assets
Section 195
Maintenance of Various Bank
Accounts
Interest Income
From NRE Account -Section 10(4)
Interest from FCNR (B) Account -Section
10(15)(iv)(fa)
Lending
Interest from Indian Company
– 5%
Deposits
115C
FEMA and Income Tax
Infrastructure debt Fund -5%, mutual Funds –20%
Interest on bonds and dividend on GDR -10%
Section 10(4) - Interest earned by a person resident outside India from non-resident external (NRE)
accounts – Rachpal Singh v. ITO (94 ITD 79)(Amr) and CIT v. Asandas Khatri (283 ITR 346)(MP)
Section 10(15)(iid) – Interest on bonds issued (NRI bonds by SBI)
Section 10(15)(iv)(fa) - Interest earned by a NR or NOR from foreign currency deposits kept with
Scheduled Bank FCNR(B)
Section 10(15)(i) - Interest on notified securities, bonds, annuity certificates and savings certificates
issued by the Central Government [Section10 (15)]
Section 10(34)/(35) - Dividends received from Indian companies and any income from specified
mutual funds
Section 10(34A) – Buy back of shares of unlisted Indian company, provided additional tax paid
u/s. 115QA
Section 10(38) - Long-term capital gains from the transfer of equity shares in a company or units of an
equity oriented fund provided such transaction is subjected to securities transaction
Special Exemption under Income Tax to NRI
Special Sections relating to NRI
Sections Nature of Income
Deduction u/s 28 to 44C and 57
Deduction u/s 80C to 80U Tax rate
115A(1)(a) The following incomes in the case of a non-resident non-corporate assessee or a foreign company - Not available 20 %a) Dividend (not being covered under section 115-O) Not available Not available 20 %b) Interest received from Government or an Indian concern on money borrowed or debt incurred by Government or the Indian concern in Foreign currency Not available Not available 5 %
c) Interest received from an infrastructure debt fund referred to in section 10(47) Not available Not available 5 %d) Interest as referred to in Sections 194LC/194LD and (with effect from the assessment year 2015-16 interest referred to in sub-section 194LBA(2)) Not available Not available 20 %
115AC The following incomes of a non resident:a) Income by way of interest or dividends (not being covered by Section 115-O), on bonds or Global Depository receipts of an Indian Company issued in accordance with the notified scheme, i.e. Foreign currency convertible bonds and Ordinarily Global Depository Receipts (Through Depository Receipts Mechanism) Scheme 1993/ Issue of Foreign Currency Exchangeable Bonds Scheme, 2008 or on Bonds/ Global Depository Receipt of public sector company sold by the Government and purchased by him in foreign currency. Not available Not available 10 %b) Income by way of Long-term capital gains arising from transfer of bonds, or as the case may be , Global Depository Receipts referred above - Not available 10 %
115 D The following incomes of a Non-resident Indian:
a) Investment income from foreign exchange assets Not Available Not available 20%
b) Long-term capital gain on transfer of foreign exchange assets - Not available 10 %
Section 115C to Section 115I
Special provisions in the case of a non-resident Indian (section 115F)
If the following conditions are satisfied , one can take the benefit of Section 115F---
• The taxpayer is a non-resident Indian (ie. An individual being a citizen of India or a person of Indian origin who is a non-resident ; a person shall be deemed to be of Indian orgin if he, or either of his parents or any of his grand parents, was born in undivided India) at the time of sale of capital asset.
• He has transferred a specified asset (ie. Shares in a Indian company , debentures of an Indian public limited company , deposits with an Indian public limited company or central government securities (hereinafter referred to as "original asset")) which has been acquired or purchased with , or subscribed to in, convertible foreign exchange .
• Such asset is a long term capital asset .
• Within six months of transfer of original asset, the taxpayer has invested the whole or any part of net consideration (ie. Consideration received less expenses on transfer ) in any of the following assets (hereinafter referred to as " New asset")--
A. Shares in an Indian company ;
B. Debentures of an Indian public limited company;
C. Deposit with an Indian public limited company;
D. Central government securities ;
E. National savings certificate VI and VII issue
Special regime || Chapter XII A under Income Tax Act
• Section 115E• Long term capital gains on sale of specified assets to be taxed at 10%• Any income from investment or income from long term capital gains of an asset other than
specified Asset to be taxed at 20%• Other income to be taxed at slab rates
• Section 115F• Capital gains tax exemption on sale of long term specified assets if the capital gains is
reinvested in any specified assets or any saving certificates specified in Section 10(4B), subject to certain conditions
• Specified Assets means following assets purchased in foreign exchange-• Shares in an Indian company • Debentures issued by Indian company which is not private company• Deposits with an Indian company which is not a private company• Any security of the Central Government or notified assets
Special regime || Chapter XII A under Income Tax Act
• Section 115G• No return of income is required to be filed by NRI if his income is consisted of only
from Long term capital gains or from investment income or both and tax has been deducted at source
• Section 115H• Benefit under chapter XII A can still be available to NRI who has become a resident in
India or income from specified assets ( debentures, deposits, government securities or notified assets) till the date of transfer or conversion into money of such specified assets, provided such declaration is to be filed along with the Return of Income
• Section 115I• NRI has an option to be governed by the normal provisions of Income Tax Act,
provided such declaration needs to be filed with ROI.
Special regime || Chapter XII A under Income Tax Act
X,Y and Z are persons of Indian origin though their residential status is non-resident. During the previous yearsrelevant for the assessment year 2016-17, their income from investment in India is as follows:
Particulars X
(INR)
Y
(INR)
Z
(INR)
a) Interest on deposits with Public Limited Companies
received on March 31, 2016
30,000 60,000 2,80,000
b) Interest from Government securities received on
December 30, 2015
1,95,000 2,40,000 2,40,000
c) Interest on deposits with private limited companies
on September 30, 2015
- 2,30,000 7,25,000
Tax deducted at source i.e. @20.6 percent in respect of
foreign exchange assets (a) & (b) and @30.9 percent in
respect of (c)
46,350 1,32,870 3,31,145
Special Regime || Practical
Particulars X
INR
Y
INR
Z
INR
Gross Total Income 2,25,000 5,30,000 12,45,000
Less: Deductions - - -
Net Income 2,25,000 5,30,000 12,45,000
Tax (including education cess and secondary and higher education cess) (d) Nil 31,930 2,04,455
Tax deducted at source (e) 46,350 1,32,870 3,31,145
Final Tax Liability (i.e. (d) – (e)) rounded off (46,350) (1,00,940) (1,26,690)
Tax liability if provisions of section 115C to 115-I are applicable:
Income from foreign exchange assets eligible for provisions of sections 115C to 115-I (ie. (a) +
(b))
2,25,000 3,00,000 5,20,000
Tax on income from foreign exchange assets (ie. @20.6% in the case of X,Y, and Z) (f) 46,350 61,800 1,07,120
Other Income (ie. (c) - 2,30,000 7,25,000
Less: Deductions - Nil Nil
Taxable Income - 2,30,000 7,25,000
Tax (including education cess and secondary and higher education cess) (g) - - 72,100
Tax liability (i.e. (f)+(g)) (h) 46,350 61,800 1,79,200
Tax deducted source (i) 46,350 1,32,870 3,31,145
Final Tax Liability (ie. (h) – (i)) rounded off Nil (71,070) (1,51,930)
Special Regime ||whether always beneficial??
X and Yshouldopt undersection115-I.
Z shouldtake theprovisionof specialprovisionsof Section115C to115-I.
Transaction 1
Investment in shares and other securities
• An NRI may, without limit, invest in following securities other than shares and convertible debentures as mentioned below:
Purchase on repatriation basis
a. Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds;
b. Bonds issued by a public sector undertaking (PSU) in India; and
c. Shares in Public Sector Enterprises being disinvested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.
d. Investment in National Pension System (NPS)
e. Bonds//units issued by Infrastructure Debt Funds. - Section 10(47) read with Section 115A(1)– Taxable at 5%
f. Listed non-convertible/redeemable preference shares or debentures issued in terms of Regulation 7 (2) of the Inbound Regulations.
g. Perpetual debt instruments eligible for inclusion as Tier I capital and Debt capital instruments as upper Tier II capital issued by banks in India.
Purchase on non-repatriation basis
a. Dated Government securities (other than bearer securities;
b. Treasury bills;
c. Units of domestic mutual funds; - Section 10(23D) read with Section 115A (1)(e) – Taxable at 20%
d. Units of Money Market Mutual Funds in India;
e. National Plan/Savings Certificates;
f. Listed non-convertible/redeemable preference shares or debentures issued in terms of Regulation 7 (2) of Inbound Regulations; or
g. Chit funds authorised by the Registrar of Chits or an officer authorised by the State Government in this behalf, provided such subscriptions are made through normal banking channels.
Investment in other securities
Section 6(3)(i) of the FEMA read with Foreign Exchange Management
(Acquisition and Transfer of Immovable Property outside India)
Regulations, 2015
Section 6(5) of FEMA 1999
An NRI can acquire by way of purchase any immovable property in
India.
Other than agricultural land or, plantation property or a farm house.
Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau and Hong Kong need prior permission of the Reserve Bank
to acquire or transfer immovable property in India [other than lease,
not exceeding five years].
An NRI may transfer any immovable property in India to a person resident
in India. He may transfer any immovable property to an Indian
Citizen resident outside India or a PIO resident outside India.
Transaction 2
Investment in immovable property outside India
(i) Transfer of immovable property
An NRI may transfer any immovable property in India to a person resident in India. He may transfer any immovable property (other than agricultural land or plantation property or farm house) to an Indian Citizen resident outside India or a PIO resident outside India.
(ii) Payment for acquisition of immovable property
NRIs can make payment for acquisition of immovable property out of:a. Funds received in India through normal banking channels by way of inward remittance from any place outside India or by debit to his NRE//FCNR(B)//NRO account.
b. Such payments cannot be made by traveller’s cheques or by foreign currency notes or by other mode except those specifically mentioned above.
(iii) No documents to be filed
(iv) An NRI who has purchased residential//commercial property under general permission is not required to file any documents with the Reserve Bank.
Investment in immovable property outside India
Refund of purchase consideration
• Refund of application//earnest money//purchase consideration made by the house buildingagencies//seller on account of non-allotment of flat//plot//cancellation of bookings//deals forpurchase of residential//commercial property, together with interest, if any (net of income taxpayable thereon) may be allowed by the Authorised Dealers by way of credit to NRE/FCNR(B)account, provided the original payment was made out of NRE//FCNR(B) account of the accountholder or remittance from outside India through normal banking channels and the AuthorisedDealer is satisfied about the bona fides of the transaction.
Application for acquisition of agricultural land/plantation/property/farm house
• All requests for acquisition of agricultural land/plantation/property/farm house by any personresident outside India or foreign nationals may be made to the Chief General Manager, ReserveBank of India, Central Office, Foreign Exchange Department, Foreign Investment Division, Mumbai– 400 001.
Investment in immovable property outside India
How many residential / commercial properties can NRI / PIO purchase under the generalpermission?
Can a foreign national of non-Indian origin be a second holder to immovable property purchasedby NRI / PIO?
Can a foreign national who is a person resident in India purchase immovable property in India?
Can a NRI acquire immovable property in India by way of gift? Can a foreign national acquireimmovable property in India by way of gift?
Can an NRI sell his residential / commercial property?
Can NRI avail of loan from an authorised dealer for acquiring flat / house in India for his ownresidential use against the security of funds held in his NRE Fixed Deposit account / FCNR (B)account? How the loan can be repaid?
Can NRI / PIO repatriate outside India the sale proceeds of immovable property held in India?
Few Questions
Capital contribution in any proprietary or partnership concern in India
Governing Legislation: Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000 vide Notification No. FEMA 24 /2000-RB dated 3rd May 2000
NRIs can invest by way of capital contribution in any proprietary or partnership concern in India on non-repatriation basis provided:
(a) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorised dealer/Authorised bank.
(b) An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business (ie, dealing in land and immovable property with a view to earning profit or earning income there from) or in Print Media.
(c) Amount is invested on non-repatriation basis.
(d) Investment with repatriation option only with prior permission from RBI
Transaction 3
• Governing legislation: The borrowing and lending by NRI is governed by Foreign ExchangeManagement (Borrowing and lending in rupees) Regulations, 2000 or Foreign Exchange Management(Borrowing and lending in Foreign Exchange) Regulations, 2000 depending on the denominatedcurrency.
Transaction 4 || Lending and Borrowing
Lending by NRIAn NRI may lend to a resident individual in foreign currency as per the terms and conditions as specified inRegulation 5 of FEM (borrowing or lending in Foreign Exchange) Regulations, 2000.
An NRI may lend to a person resident in India under automatic route/approval route any foreign currencyloan subject to conditions specified in Regulation 6 of FEM (borrowing or lending in Foreign Exchange)Regulations, 2000.
An NRI may lend to a person resident in India not being a company incorporated in India in Indian Rupeeson non-repatriation basis subject to conditions specified in Regulation 6 of FEM (borrowing or lending inRupees) Regulations, 2000.
Lending by NRI
Remittance
Governing Legislation: Remittance of assets is regulated by Foreign Exchange Management(Remittance of Assets) Regulations, 2016
On submission of documentary evidence
Remittance up to USD one million, per financial year
Conditions:• out of balances in their non-resident (ordinary) (NRO) accounts/sale proceeds of assets/assets acquired in
India by way of inheritance/legacy;• in respect of assets acquired under a deed of settlement made by either of his/her parents or a relative as
defined in Companies Act, 2013. The settlement should take effect on the death of the settler;• in case settlement is done without retaining any life interest in the property, ie, during the lifetime of the
owner/parent, it would tantamount to regular transfer by way of gift and the remittance of sale proceedsof such property would be guided by the extant instructions on remittance of balance in the NRO account;
• in case the remittance is made in more than one instalment, the remittance of all instalments should bemade through the same AD;
• where the remittance is to be made from the balances held in the NRO account, the Authorised Dealershould obtain an undertaking from the account holder stating that “the said remittance is sought to bemade out of the remitter’s balances held in the account arising from his/her legitimate receivables in Indiaand not by borrowing from any other person or a transfer from any other NRO account and if such is foundto be the case, the account holder will render himself/herself liable for penal action under FEMA.”
Remittances under FEMA
RBI approval required :
a. Remittance is in excess of USD 1,000,000 (US Dollar One million only) per financial year(i) on account of legacy, bequest or inheritance to a citizen of foreign state, resident outside India and(ii)by NRIs/PIOs out of the balances held in NRO accounts/sale proceeds of assets/the assets acquired byway of inheritance/legacy.
b. Hardship will be caused to a person if remittance from India is not made to such a person.
c. Remittance of funds from the sale of assets in India held by a person, whether resident in oroutside India, not covered under the directions stipulated above will require approval of theReserve Bank.
Remittances subject to payment of applicable taxes in India.
“Remittance of asset'” means remittance outside India of funds in a deposit with a bank/firm/ company, provident fund balance or superannuation benefits, amount of claim ormaturity proceeds of Insurance policy, sale proceeds of shares, securities, immovable propertyor any other asset held in India in accordance with the provisions of the Act or rules/regulations made under the Act.
Remittances under FEMA || RBI Approval
195(1)
• Payment by any person to a non resident
• Interest or any other sum chargeable to tax
• Payment or credit which ever is earlier
• Other than salary and dividend referred in section 115 0
195(2)
• Application by “Payer” if he considers whole of sum is not Income chargeable to Tax
195(3), 195(4) and
195(5)
• Application by “ payee” for lower or Nil withholding
195(6)
• Furnishing of information in prescribed Form viz. 15CA/15CB
Remittances under ITA || Section 195 at a Glance
Any sum chargeable to tax
• If payment is not chargeable to income Tax – the provisions of section195(1) does not apply
Section 195 at a Glance
GE India Technology Centre Private Limited (327 ITR 456) SC
Where payment made by resident to non resident, was an amount notchargeable to tax in India, no tax is deductible at source even though assessehas not made any application to AO
CBDT Instruction No. 2/2014
CBDT vide instruction no. 2/2014 instructed that in cases where assesse doesnot withhold taxes under section 195 of the Act, the AO is required to determinethe income component involved in the sum on which the withholding taxliability is to be computed and the payer would be considered as being in defaultfor non withholding of taxes only in relation to such income component.
Any sum chargeable to Tax
• Illustrative payments to Non-residents not chargeable under the Act: Payments on capital account, for example, gifts, loans, repayment of loans,
etc. Sums which are on revenue account and which are not chargeable to taxat all under the Act in the hands of the recipient
Sums which fall within the scope of Section 5 of the Act, but which areexpressly exempt under the Act. for example, dividend income
Any sum chargeable to tax - Payments not included
Address of the Non-resident
Meena S. Patil vs ACIT (International Taxation, Circle19(1), [2008] 114 ITD 181 (Bangalore)/[2008] 113 TTJ 863
Assessing Officer was correct in passing an order under section 201(1A) imposing interest liability on assessee. Assessee’s contention that it was not and could not have been aware of fact that seller was a non-resident cannot be considered since the sale agreement seller’s address was clearly mentioned which showed that he was residing abroad.
Syed Alam Hashami 55 SOT 41 ( Bangalore)
Where seller of Indian property was NRI according to address given in sale deed, assessee-purchaser ought to have made TDS under section 195 on sale consideration payable to NRI seller, failing which he was to be treated as assessee-in-default under section 201(1).
Payment in kind
Kanchanganga Sea Foods Ltd. v. CIT, (SC) (2010 (6) SCALE 442
The assessee is liable to deduct tax at source under section 195 on the payment made to the non-residenteven though the payment is not made in cash but made in kind
Payments || Who is NR
• Payment made through an intermediary
ITO vs. Abu Dhabi Commercial Bank 65 SOT 43 (Mum) The assessee bank made remittance on behalf ofbrokers in respect of gains on the basis of NIL certificate issued by a CA.
The bank was only acting as an authorised dealer in transferring the funds on behalf of the broker and is notliable to deduct tax under section 195 and consequently is not an assessee in default.
• Commissioner of Income-tax v. Hardarshan Singh 350 ITR 427 (Delhi HC)
Assessee carried on businessof commission agent by arranging for transportation of goods through othertransporters
As contract was between clients and lorry owners/transporters assessee did not deduct tax at source whilemaking payments to transporters
Tribunal set aside orders holding that assessee acted only as a facilitator or intermediary and there was noprivity of contract between assessee and client for carriage of goods - Accordingly, Tribunal concluded thatassessee was not liable to deduct tax at source
Payments || Made through an intermediary
Raj Girish Karia [2014] 48 taxmann.com 175 (Mumbai - Trib.)
Facts:
The assessee was a dealer in marbles and granites which it imported from various countries
In the process, the assessee paid freight and insurance charges to foreign shipping agents on the goods imported by it.
The assessee did not deduct tax at source from the said payments placing reliance on the Circular No. 723 dated 19-9-1995issued by CBDT wherein it has been stated that provisions of sections 194C and 195 relating to tax deduction at source werenot applicable in respect of foreign shipping companies whose income was subjected to tax under section 172. The assesseesubmitted that it had made payments to either foreign shipping companies directly or to the agents of the foreign shippingcompanies.
The Assessing Officer, however, held that assessee was liable to deduct tax at source on the payment in question andaccordingly he disallowed the same by invoking the provisions of section 40(a)(i).
Held:
Circular No.172 issued by the CBDT has made it clear that the provisions of sec. 194C and 195 relating to tax deduction atsource will not apply to the payments made to non-resident shipping companies only if their income is assessed u/s 172 of theAct.The assessee has to show that the shipping companies to whom payments were made are not only non-residents but also hehas to show they were assessed under section 172. Only if the assessee is able to prove the above facts, then he will berelieved of from the liability to deduct tax at source from the payments made to them towards freight and insurancecharges
Payments || Important decisions
Any person• responsible for paying• Payer itself and in case of company , the company including the principle officer• Including an Individual and HUF (whether or not carrying business)
Agent not liable to deduct tax at source from payments to non residents principal.Whether payer includes a non residentWhether payment by one non resident to another non resident in covered by Section195(1)?Explanation 2 to sub section (1) of the Section 195 clarifies that the obligation tocomply with sub section (1) and make deduction thereunder applies and shall bedeemed to have always applied and extends and shall be deemed to have alwaysextended to all persons, resident or non resident whether or not the non residentperson has a residence or place of business or business connection in India or anyother presence in any manner whatsoever in India
Section 195 at a Glance || Payer
Section 195 refers to deduction of tax at the “ Rates in force”
“ Rates in Force” defined in Section 2(37A)
Rates of Income Tax specified in the Finance Act or the rates specified in DTAA which ever is applicable by virtue of Section 90 or 90A
Non furnishing of PAN
Section 206AA – overrides the entire Act
Applicability of Section 206AA for payments where tax is not required to be withheld under the Act or the tax treaty
Section 195 at a Glance || Rates
• Non Furnishing of PAN• Amendment by Finance Act 2016 w.e.f 1 June 2016
• Notification No. 53/2016 – dated 24th June 2016• Rule 37BC – Relaxation from deduction at source at higher rate under Section 206AA
• Non resident not being a company or a foreign company (‘deductee”)
• Payment in nature of Interest, royalty, fees for technical services and payments on transfer of any capital asset.
• If deductee furnishes details and documents as prescribed
• Consequential amendments in Form No. 27Q.
Section 195 at a Glance || Rates
• If payee bears the tax liability I,e. payment is “ net of tax” then for computing TDS, income should be grossed up
Section 195 at a Glance || Grossing up
• Finance Act 2012 mandated non residents to obtain TRC (in prescribed format) from resident tax authorities
• Finance Act 2013 which did away the format, stated that it would be enough if tax payer obtains TRC and maintains prescribed documents /information
• Notification No. 57 of 2013 – Additional documents
• Issues • Stages/time limit to obtain TRC
• Different Tax years
• TRC not obtainable/ delay
Tax Residence certificate
• Application to be made to AO when the payer considers whole income not to bechargeable
• AO to determine the portion of payment chargeable to tax and to issue certificateaccordingly
• The permission granted by AO would be in force for the period as specified
• On determination, tax to be deducted on the sum chargeable to tax
• Decision under Section 195(2) should not be treated as conclusion in thedetermination of Income in case of a foreign company
Remedy available to Payer ||Section 195(2)
• Information on remittance of amount to be furnished by the payer in the form 15CA
• Certificate from chartered accountant to be obtained in Form 15CB
• Procedure prescribed in Rule 37BB of the Income Tax Rules
• Points to be factored• Examination of PE and attribution of profit to PE
• Beneficial ownership/Tax residency, whether TRC is sufficient evidence to claim Tax Treaty benefits
• Classification of Income – Royalty, FTS etc.
• Issuance of certificate in absence of complete information about payee
Section 195(6) || Certificate from Chartered Accountant
DCIT Vs. rediff.com India Ltd
• Chartered Accountants certificate for TDS on payments to non residents had nodecisive impact on determination of taxability of payments to non residents. It isonly prima facie evidence about taxability status and cannot substituteadjudication of taxability by AO.
ADIT vs. Tata Communications Ltd
• Where the assesses had duly obtained the certificate from Chartered Accountantand had made remittance based on the certificate. A demand u/s 201(1A) cannotbe raised on the assesse merely because he had not obtained prior approval of theAO u/s 195(2) of the Act
Section 195(6) || Certificate from Chartered Accountant
Procedure of remittance || Revised Rule 37BB with effect from 1 April 2016
Sl.No
Information Part A Part B Part C Part D
1. Nature ofRemittance
Payments during thefinancal year doesnot exceed Rs. 5 Lacsand Remittance issubject to tax.
Payments during thefinancial year does not
exceed Rs. 5 Lacsand Remittance is subject totax and an order / certificateu/s 195(2)/(3) / 197 of the
Act has beenobtained from AO
Payments duringthe year exceeds Rs.5 Lacs andRemittance issubject to tax.
Payments notchargeable totax
2. Requirement ofCA
Certificate
No No Yes No
If Part C is applicable, obtain certificate of Accountant (Form 15CB)
Electronically upload the remittance details in Form 15CA
Take print out of filled form (15CA) with system generated acknowledgment
number
Print out of the undertaking form (15CA) is signed
Submit the signed paper undertaking to AD alongwith Form 15CB in duplicate.
AD remits the amount
Remitter to determine which part (A to D) the payment falls
Step wise procedure of remittance
Professional Opportunities under FEMA
• Certification
• Advisory
• Transaction structuring
• Due Diligence
• Compounding
TO NAME THE FEW……..
Queries
• Suppose Mr. A (NRI) wishes to purchase existing shares of an Indian Company from Mr. B(resident). One way is to do so under FDI scheme by complying with pricing guidelines andsectoral caps under FDI scheme. However, as an alternative, can he purchase existing shares onnon-repatriation basis from Mr. B (without paying to company) under Schedule 4. Whether it ispermissible under FEMA regulations? If yes, whether he has to still comply with formalities(stipulated for FDI) of getting the pricing/valuation done, filing of FC-TRS form and otherconditions when the shares are being acquired on non-FDI route under Schedule 4. Kindlythrow some light on the same.
• Any investment made by an NRI under Schedule 4 of Inbound Regulations on repatriation basisshall not be considered as Foreign Investment. Such an investment will be deemed to be domesticinvestment at par with investment made by residents ( vide press note 7 of 2015 Series effectivefrom 18 June 2015) and a company, trust and partnership firm incorporate outside India andowned and controlled by non-resident Indians can invest in India with the special dispensation asavailable to Non-residents Indians under the FDI Policy ie, the special treatment applicable to NRIhave also been extended to the companies, trust, partnerships owned by them (vide press note12 of 2015). Transfer forms should be filed to help company to take note of transfer and recordthe same.
Query 1
Many times it is mentioned in different circulars of FEMA, that RBI permission isnecessary, but I don’t know what is the procedure of taking RBI permission? Is there isany specific Form and which office or authority I have to approach for permission?
• Mostly it is RBI permission required to be taken
• Most of the powers of such permission have been delegated to AD banker
• Permission of RBI is required to be directly at few places by making an application to RBI.
• At few places which fall under approval route the permission from FIPB is required to betaken
• For all most all the permissions required to be taken there is specific form. However,there are also cases where no such form is mentioned for eg.• in case of compounding application,• in case of conversion of debt in to share capital,• in case of write off of assets etc.
Query 2
• Holding Company is in USA and Subsidiary Company is in India. In 2004 the holding companytransferred the funds of Rs.2 Corer to subsidiary company, which is declared as “softwaredevelopment charges” to AD. However, subsidiary company not able to provide the requiredservices to the holding company. Therefore, Holding and subsidiary company both mutuallydecided and this amount is shown as loan in the books of the subsidiary company. Now, in 2016,
the company wants to convert this loan into share capital, by issuing the shares to holding co.It this arrangement is possible? As company is not repatriating fund in Indian in 2016, FC-GPRForm need not required to submit, kindly confirm. If this arrangement is done what is theconsequences?
Query 3
• Imports into India should be in conformity with the Foreign TradePolicy in force and Foreign Exchange Management (Current AccountTransactions) Rules, 2000 framed by the Government of India videNotification No. G.S.R.381 (E) dated May 3, 2000 and the Directionsissued by Reserve Bank under Foreign Exchange Management Act,1999 from time to time.
• The remittances against imports should be completed no later thansix months from the date of shipment, except in cases whereamounts are withheld towards guarantee of performance, etc.
• AD Category – I banks may permit settlement of import dues delayeddue to disputes, financial difficulties, etc.
Query 3 || Import Regulation
Query 3 || Repayment of debt
Repayment of debt**
If aging of debt is less than six months
Can be paid
If aging is more than 6 months and less
than a year
Although the time limit of payment of debt is within six months the debt can be
paid within one year practically
Debt more than 1 years till 3 years
Application can be made to AD Bank with a request to
make payment. Bank can allow in case of financial difficulty
Debt more than 3 years
Deemed as ECB
Conversion into Equity**
Conversion of ECB into Equity
No RBI approval required
Issue of Equity shares against legitimate dues
No RBI approval required
Issue of equity shares against the Import of Capital Goods
RBI Approval required
Issue of shares against the Import of other than capital
goods*
Conversion not allowed. Needs to be paid back.
Application to RBI for payment
Query 3 || Conversion of debt into share capital
Whether Indian co can adjust foreign debtors and creditors with same party or another party ? For supplies against services or vice versa. Any restrictions of either of FEMA or income tax?
Netting-off of export receivables against import payments – Units in Special Economic Zones (SEZs)
AD Category - I banks may allow requests received from exporters for ‘netting off’ of export receivables against import payments for units located in Special Economic Zones subject to the following:
(i) The netting off of export receivables against import payments is in respect of the same Indian entity and the overseas buyer / supplier (bilateral netting) and the netting may be done as on the date of balance sheet of the unit in SEZ.
(ii) The details of export of goods are documented in EDF (O) forms / DTR as the case may be while details of import of goods / services are recorded through A1 / A2 form as the case may be. The relative EDF will be treated as complete by the designated AD Category – I banks only after the entire proceeds are adjusted / received.
(iii) Both the transactions of sale and purchase in R- Returns under FETERS are reported separately.
(iv) The export / import transactions with ACU countries are kept outside the arrangement.
(v) All the relevant documents are submitted to the concerned AD Category – I banks who should comply with all the regulatory requirements relating to the transactions.
Query 4
R and NR are the existing shareholders in an Indian company. Now company wants to infuse additionalcapital of INR 15 Crore and offers shares to R as well as NR in the existing ratio i.e. Right issue. The Bookvalue of the share of the company is around Rs 1750 per share (FV Rs 10). Rights are offered to R as wellas NR but subscribed by only NR.
As per Regulations
The offer on right basis to the persons resident outside India shall be :
(a) In case of shares of a company listed on a recognised stock exchange in India, at the price as determined by the company
(b) in the cases of shares of a company not listed on a recognised stock exchange in India, at a price which is not less than the price atwhich the offer on right basis is made to resident shareholders.
Your thoughts on…..
1. Whether company can issue shares to NR at FV of Rs 10?
2 whether such transaction is hit U/s 56 of I T Act ?
3. Whether any problem under TP angle as share valuing at Rs 1750 is being issued to NR at mere F V of Rs 10?
4. If above is problematic under TP angle what should be the minimum rate at which shares can be issued by the company to NR?
Query 5
• One couple purchase house property jointly. After death of lady ownership of herpart transfer to 2 children. They sold house property. LTCG arises. But one childwho is resident in UK want to transfer there part in UK. Tax implication in this caseand FEMA applicability for transferring LTCG from India to UK. UK base child wantto purchase house property in UK.
Child residing in UK can acquire immovable property in India out of inheritance.
NRI can remit the money received out of sale of property received in remittance asper Foreign Exchange Management (Remittance of Assets) Regulations, 2016.
Capital Gain may arise. Taxability of Income is dependant on Residential Status. Inall cases the Income which has arise in India is taxable. Since the source of Incomeis in India. So tax is payable here.
Whether the benefit of section 54 can be claimed? No.
Query 6
Goods are exported outside India to Mr. X and the only name of Mr. X is mentioned on the exportinvoice. But payment is made by Mr. Y. We have prepared the tri party agreement between these three.Can AD (bank) reject this tri party agreement showing the reason that the name of the Mr. Y is not oninvoice.
No, AD should not reject this tri party agreement.
Normally in the cases of international trade a situation can arise where the payment is required to be made to third party instead of theparty from which the export was done. Taking into account the evolving international trade practices, RBI has decided to permit third partypayments for export / import transactions can be made subject to conditions as under:
a) Firm irrevocable order backed by a tripartite agreement should be in place. However, it may not be insisted upon in cases wheredocumentary evidence for circumstances leading to third party payments / name of the third party being mentioned in the irrevocableorder/ invoice has been produced subject to:
(i) AD bank should be satisfied with the bona-fides of the transaction and export documents, such as, invoice / FIRC.
(ii) AD bank should consider the Financial Action Task Force (FATF) statements while handling such transaction.
b) Third party payment should be routed through the banking channel only;
c) The exporter should declare the third party remittance in the Export Declaration Form and it would be responsibility of the Exporter torealize and repatriate the export proceeds from such third party named in the EDF;
d) It would be responsibility of the Exporter to realize and repatriate the export proceeds from such third party named in the EDF;
e) Reporting of outstanding, if any, in the XOS would continue to be shown against the name of the exporter. However, instead of the nameof the overseas buyer from where the proceeds have to be realized, the name of the declared third party should appear in the XOS;
Query 7
A person received salary from Italy in dollars in his NRE account in India & he is in India for less than 180 days. What is the taxability of his salary.
Taxability of Income is dependent on residential status. The residential status of this person looks like non resident. Kindly refer to below chart. Based on this. The above does not seem taxable in India.
Query 8
A Builder company has taken advance against flat booking from NRI in foreign exchange now the NRIcustomer wants to cancel the flat booking, can the builder refund the booking amount in ForeignExchange?
• Refund of application//earnest money//purchase consideration made by the house buildingagencies//seller on account of non-allotment of flat//plot//cancellation of bookings//deals forpurchase of residential//commercial property, together with interest, if any (net of income taxpayable thereon) may be allowed by the Authorised Dealers by way of credit to NRE/FCNR(B)account, provided the original payment was made out of NRE//FCNR(B) account of the accountholder or remittance from outside India through normal banking channels and the Authorised Dealeris satisfied about the bona fides of the transaction.
Query 9
NRI became resident during FY 15 – 16 and having rental income from Singapore and has paid taxthere. Now where to show the tax paid in Singapore in return of Income after showing rental incomein ROI. IS there any mechanism like 26AS available with government for cross check.
Refer Notification no. S.O. 2213 dated 27th June 2016. Form 67 along with other documents specified inSub Rule 8 to be submitted for claiming foreign tax credit.
Query 10
• If exporter and importer is the same person (but firm name is different), in short exporter has registered himself in FTZoutside India and export the good to his own entity. Can such transaction is allowed under FEMA/RBI? Whether suchtransaction is treated as export?
• Can exporter bring the export proceeds in cash from overseas buyer? Is there any limit for the same? In such situation,how to approach the bank for BRC?
• NRI became resident during FY 15 – 16 and having rental income from Singapore and has paid tax there. Now where toshow the tax paid in Singapore in return of Income after showing rental income in ROI. IS there any mechanism like26AS available with government for cross check.
• Kindly help me with the query please. Does a person become resident as soon as he comes to take up employment inIndia or the basic condition of 182 days still needs to be checked? The law is quite confusing. Pl help.
• Is an Indian branch of a foreign company established under the RBI rules as BO considered a PE for the purpose of TP.
• Whether any property belongs to NRI in India is bought by an Indian. Is NRI liable to deduct TDS?
• The company has brought the foreign investment in India by issuing shares, in December 2011. The Form FC-GPR isalready submitted to the AD (i.e. HSBC Bank). In 2016 company got the notice from RBI regarding not filing of FC-GPR.What is the remedy for the company, if FC-GPR is submitted to AD but AD has not forwarded to the RBI?
• If overseas customer does not pay after long follow up and it becomes bad debts. What is the proof of these bad debtsis expected under FEMA/RBI? Is there any obligation by FEMA / RBI on exporter, in such situation?
Misc. Queries
Your questions ??
Thanks..CA. Sudha G. BhushanAssociate Director : International Transaction advisory servicesTaxpert Professionals 09769033172 || [email protected]