Non-Residents and the Indian Budget

By Porus Farrok Kaka
LLB(Bom),LLM(Harvard)

In this article I propose to examine the proposals which affect non-residents and their implications.

In his speech introducing the Budget the Finance Minister unveiled the following proposals :

(A) NEW PROPOSED BONDS/MEASURES IN THE CAPITAL MARKET

  • Non-Resident Indians (hereinafter referred to as “NRI’s”) will now be able to invest in the Indian secondary market up to a limit of five percent per NRI per company and the aggregate limit for all NRI investments in a company is now raised to ten percent. Previously the limit was one percent per NRI and five percent for all NRIs per company;
  • The Finance Minister is having the procedures for investment by NRI’s to invest in the Indian capital market thoroughly revised with a view to modify them to facilitate investment;
  • Two new schemes are being launched namely :-
    • Indian Millennium scheme which will be open for subscription by NRIs in dollars, the money collected under this scheme will be invested in shares of Indian companies with high potential for growth ;and in high quality Indian debt;
    • New Resurgent India Bond denominated in foreign currencies and used for building up infrastructure. These bonds will be fully repatriable and the government will extend tax concessions currently available on other NRI deposits to these bonds.

(B) DIRECT TAX PROPOSALS

  1. Deletion of "Not ordinarily Resident" status.

    By clause (6) of the Finance Bill, Sub-Section (6) of Section 6 of the Income-tax Act, which created a special category of resident but not ordinary resident is proposed to be deleted. The effect of this provision was that such persons were only taxable in India on income accruing, arising or deemed to accrue or arise or received in India. They were not taxable on their world income. In the notes to clauses to the Finance Bill, it has been provided that the reasons for the same is that this intermediate status between the residents and non-residents which was created in 1938 to provide relief to European Officials in the initial years of stay in India, had outlived its utility and therefore, is proposed to be deleted.

    It is obvious that those who drafted the Bill either were not conscious of its implications or oblivious to its consequences. A day after the introduction of the Finance Bill reports have appeared in the Press that the Central Board of Direct Taxes proposes to delete this proposal.It is strange that something from 1938 stated to have outlived its utility recovers its utility in less than 24 hours.

    In any case, the consequences of this provision would be that any person, foreign citizen or otherwise, whose stay in India exceeds 182 days will become taxable in India on his "world income". Therefore, technicians deputed to India, persons serving in branches of foreign companies, foreign nationals deputed to India will now all become taxable on their "world income". If they are also "resident" of another country in which there is a Double Taxation Convention between that country and India, one would normally have to go to the "tie breaker" clause to find out with which country the person is effectively connected with to determine which country he will be deemed to be resident in.

    There are several other consequences arising both under Wealth-tax law and Gift-tax law with regard to the proposed deletion of the status which will be examined in detail in the latter part of this article.

  2. Deletion of exemptions available in respect of certain allowances.

    (I) Under section 10(15)(iv) income-tax exemption provided in respect of interest payable on foreign currency loans to the following parties is proposed to be removed.

    • borrowings by industrial undertakings in respect of purchase outside India, of raw-material components or capital, plant and machinery;
    • borrowings by a financial institution or a banking company for the purposes similar to clause (a) above;
    • borrowings by industrial undertakings under loan agreements approved by the Central Government.

    It may be noted that Sec.10(15)(iv) gave exemption thus resulting normally in lower cost of borrowings to the Indian concern in view of the fact that no tax was payable by the lender. Unless the lender has taken care contractually of providing an increased interest payable in the consequent to a change in the tax law, in view of the deletion such foreign lenders would undoubtedly be worse off.

    (II) The present exemption available under Section 10(5A) to non-residents not being citizens of India, who come to India in connection with shooting cinematograph films for the remuneration received by him for rendering any service in connection with such shooting is proposed to be taken away.

    According to the notes on clauses this proposed amendment is due to the fact that the clause has outlived its utility. The author wonders whether this means the all foreign film ventures who proposed to shoot films in India have now completed their ventures and there are no other ventures in the pipeline. Perhaps Hollywood and Bollywood are now truly going to be separated and in a Swadeshi Budget Bollywood is better off.

    I may only note that under explanation (d) to section 9(1)(i) income accruing or arising to a person through or from operations confined to the shooting of any cinematograph film in India is still not taxable in India. Therefore, it is a moot point what effect of the above amendment by deletion of section 10(5A) seeks to achieve. Interestingly the amendment in section 9 to exempt this income was simultaneously introduced by the Finance Act, 1984 with effect from l.4.1982 but only one of them is proposed to be deleted. Interestingly to the best to the author’s knowledge, both were introduced at the time of shooting of the film Gandhi.

    (III)Further the following exemptions available to non-citizens are proposed to be withdrawn:-

    • amounts paid by the employer so that the employees children studying abroad could visit India during vacation;
    • in respect of remuneration received for services rendered to foreign philantrophic associations in India;
    • tax paid by the employer on tax free salary to foreign techinicians;
    • salaries to professors and amounts paid toresearchers in India;
  3. Deductions available under Chapter VI

    (I) Amendment made to Section 80-IA of the I.T.Act

    (a) The benefit of Section 80-IA has been extended to radio paging and domestic satellite services. Domestic satellite is defined as satellite owned and operated by an Indian Company for providing telecommunication service.

    (b) Inland waterways, inland ports and housing projects approved by the prescribed authority have been notified as infrastructure facilities on which deduction is available.

    (II) New Section 80JJ

    Section 80-JJ a new deduction from the gross total income of an assessee of any profit derived from the business of collecting processing or treating bio degradable waste for generating producing bio gas, etc. Is available upto a maximum of Rs.5 lakhs.
  4. Kar Vivad Samadhan Scheme

    Under Chapter IV to the Finance Bill, a new scheme called The Kar vivad Samadhan Scheme has been introduced under which where a person has tax arrears as on the 31st day of March l998 under both direct or indirect taxes enactments, then upon payment of

    (a) where the tax arrears arise under the I.T.Act :

    • in the case of a company or a firm at the rate of 35% of the disputed income; or
    • in any other case at the rate of 30% of the disputed income;or
    • where tax arrears includes income-tax, interest payable or penalty levied at 35% of the disputed income or 30% as the case may be respectively; or
    • where tax arrears comprises only interest or penalty 50% of the same; or
    • where the tax arrears includes interest or penalty being in the case of search and seizure payment at the rate of 45% of the disputed income in the case of a company or 40% in any other case; then immunities from prosecution, imposition of penalty, etc. are available to assessees.

    There are similar provisions covering the Wealth Tax Act, Gift Tax Act, and Interest Tax Act and other indirect tax enactments, such as Customs Act, Central Excise Tariff Act, etc.

  5. Depreciation has been extended and made available in respect of intangible assets also such as know how patents, copy rights, trade marks licences, franchises, etc.
  6. Deduction of tax on salaries In the case of an assessee making a loss under the head ‘income from house property; then the provisions of section 192 requiring tax deduction at source by employer there is an amendment permitting the employer to take into account the loss made at the time of deduction of tax at source.
  7. Wealth-tax

    With the proposed deletion of the “not ordinary resident” status, assets outside India, will also be liable to wealth-tax if the stay of such individuals exceeds more than 182 days in India.

    The provisions of Wealth-tax have been liberalised by the following :

    1. The exemption of residential houses allotted by companies to employees, the limit for the employees salary has been raised to 5,00,000/- rupees also residential property let out for a minimum period of 300 days during the previous year is excluded from the definition of assets liable to Wealth-tax.
    2. Commercial establishments and complexes have been excluded and property held as stock-in-trade is available for exclusion upto a period of 7 years from the date of acquisition.
    3. Also houses which the assessee also occupies for the purposes of any business or profession is excluded.

    There is a restriction. However, on the exemption available under section 5, of one house or part of a house. It now must not exceed 500 sq. Mtrs.

  8. Gift Tax Amendments

    The first consequence that strikes one is that the several exemptions originally provided under section 5 to non-residents under the gift tax act are no longer present:

    • previously gifts off immovable property outside India was not charged to gift tax there is no such provision now. Therefore by this amendment the extra-territoriality of what will become a part off the Income-tax act is extended way beyond Indias shores.
    • Also gifts of movable property outside India is also now not exempt

    Therefore the consequence of these amendments would be that all gifts made by any person (resident or non-resident)of any property situated anywhere in the world is now taxable in India in the hands of the recipient. However in the cases of non-residents as long as the proceeds are received outside India and the property and gift is made outside India by virtue of the provisions of Section 5 it would be arguably income accruing or arising outside India and hence not taxable, but a suitable amendment would undoubtably be desirable. As far as residents go there is no escape and now with the status of not ordinary residents being proposed to be done away with several former "not ordinary residents" who become "residents" by virtue of stay exceeding 182 days will be chargeable to gifts received in their home country where they may have paid gift tax, and it not being income-tax in the home country it would be a moot point whether credit for the gift taxes paid (in the home country) either under section 91 or a Double Taxation Convention will be available in India when it is again subjected to Income-tax.

    In Clause 25 off the Finance bill it has been provided that from a 1999 when there is a transfer of a capital asset being land and building or both together, the value adopted or assessed by state govt authorities for the purposes of stamp duty will become the full value of the consideration for the purposes of capital gains tax. Apart from the capital gains tax consequences the absurdity from this amendment could be that even in cases of a transfer which is assessed to gift tax in the hands of the transferee there would be a simultaneous capital gains tax liability in the hands off a transferor. There it is no provision in the newly inserted computation provisions of gift tax for excluding amounts charged to capital gains in the hands of the transferor.

    The last issue that strikes one is that now that tax is being charged under the Income-tax act and where a gift is a made which has been charged to income-tax, in the case of a non-resident who is entitled to a tax treaty benefits, the said non--resident could perhaps claim a credit (in his home country)in respect of a gift which has been charged to tax in India as now that tax payable would-be income-tax.

(C) POLICY ANNOUNCEMENTS

  • The Finance Minister in his speech has proposed appointing a ‘Monitoring Officer’ to supervise the clearances of foreign direct investments.
  • Clearances by FIBP would be given within 90 days.
  • The Foreign Exchange Regulation Act will be replaced with a new Act and simultaneously a new Money Lending Bill is to be introduced.
  • Insurance sector is to be opened to Indian Companies.
  • Derivatives to be brought within the definition of securities under the Securities Contract Regulation Act.
  • Employees employed in the software sector will be permitted to avail stock options issued Internationally.

These are some of the major direct tax implications and some policy announcements affecting non-resident Indians in the Finance Bill 1998.