INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 10): India
By Ashishkumar Bairagra, M L BHUWANIA AND CO LLP
In dia is known for its strict international tax compliance applicable to residents as well as non-residents who are liable to file their tax returns in India. Landmark judgements include the case of Vodafone (on indirect purchase), Asia Satellite (on satellite charges), Formula One (on permanent establishment [PE]), Morgan Stanley (on dependent agent PE) and the most recent case of Master Card (on service PE).
As per the (Indian) Income-Tax Act 1961 (ITA) a tax resident in India is liable to tax on their global income and also liable to disclose their global assets in their annual tax return. A tax non-resident is liable to tax on income received or deemed to be received in India or income deemed to accrue or arise in India and, as one can imagine, it is the deeming fiction which has created most of the controversy. In addition, India has also introduced regulations for “Place of Effective Management” and “Equalisation Levy” to keep pace with the BEPS Action plan.
Main Types of Business and Taxes for Each Entity
For Individuals / Hindu Undivided Family Association of Persons / Body of Individuals:
India also has various other forms of taxes like dividend distribution tax, capital gains tax, and minimum alternate tax, and a wide-ranging withholding tax regime, along with various doubletax avoidance agreements (DTAA).
Types of Trusts and Their Taxability
The ITA does not have specific charging sections for trusts; hence taxability of the various forms of trusts has been determined through judicial rulings over the past decades. Taxability of a few common forms of trusts is briefly discussed as follows:
1. Charitable/Public Trust incomes and donations are not taxed if stringent conditions of utilising the donations towards the objective of the trusts are fulfilled.
2. Private Trust settlor is taxed if the trust is revocable.
3. Discretionary Private Trust the trustee is taxed as the representative since beneficiaries or their shares are unknown or undetermined.
4. Specific Private Trust beneficiaries are taxed since share of each beneficiary is known, but the tax can be paid by/recovered from the trustee.
5. Foreign Trust if the income of the trust is liable to tax in India, then it is taxable in India.
6. Foreign Trust if the settlor or trustee or beneficiary is tax resident in India, then the person is liable to tax in India. It may be noted that beneficiaries are liable only on any distribution by the trust.
7. Foundations similar principles as applicable to trusts are followed.
A trust is taxed at the maximum marginal rate of 30% + surcharge + cess if the trustee is liable to tax on behalf of the trust. If the income is taxed in the hands of the beneficiary or settlor, then the tax rate applicable to the beneficiary or settlor is applicable.
Tax Compliance Requirements for Owners of Foreign Assets
Tax residents in India are liable to disclose their global income and global assets, whether held directly or if they hold a beneficial interest, held at any time of the year in their annual tax return with details for each of the following:
1. Foreign Depository Accounts held;
2. Foreign Custodial Accounts held;
3. Foreign Equity and Debt Interest held in any entity;
4. Foreign Cash Value Insurance Contract or Annuity Contract held;
5. Financial Interest in any Entity held;
6. Immovable Property held;
7. Any other Capital Asset held;
8. Account(s) in which they have signing authority held which has not been included above;
9. Trusts, created under the laws of a country outside India, in which they are a trustee, beneficiary or settlor;
10. Any other income derived from any source outside India which is not included above or in other parts of the tax return.
Tax Compliance Requirements for Estate and Wealth Planning Matters
Traditionally in India, a testamentary will has been the preferred route for estate and wealth planning since it is the most optimum route for tax purposes. In recent times, due to various litigations amongst legal heirs and claimants, family trusts are starting to become popular. There are also rumours that just like some of the developed economies, India may soon introduce “inheritance tax” and hence high net-worth individuals (HNI’s) are scrambling to form trusts and plan their inheritance.
It is important to note that apart from income tax, there could be implications of stamp duty, state/local regulations requiring permissions/approvals, valuation norms, and other hindrances in estate and wealth planning matters which involve real estate or immovable assets. In recent years, FATCA has been a major concern while evaluating such planning situations, especially if one of the beneficiaries is covered by FATCA regulations. Similarly, while planning for foreign assets, adequate precaution should be considered if one of the beneficiaries is a tax resident of India.
Tax authorities will request detailed documentation for assets/gifts received as part of an estate/wealth from an individual, including for establishing the relationship. In most cases, the cost of the original holder is considered to be the cost of the new holder and the period of holding is considered to start from the date when the asset was acquired by the original holder; hence it is important to preserve the primary acquisition document of the original holder to claim maximum relief/deduction at the time of sale of the inherited asset.
Tax Compliance Requirement on Sale of Real Estate
If a non-resident sells real estate in India, there are myriad regulations and compliances which they will need to fulfil. The most important one is the withholding tax obligation on buyers to deduct and deposit 20% + applicable surcharge + cess on the entire sale consideration with the tax authorities on behalf of the seller. These withholding tax regulations do not allow the buyer to consider the actual capital gain (if any) earned by the seller. The only option is for either of them to file an application to the tax authorities to determine the actual capital gain earned by the seller, derive the actual amount of tax payable by the seller on the sale of the real estate, and issue a certificate enabling the buyer to deduct the specific amount as withholding tax. This process is time consuming and requires planning in advance, which is rarely possible in such situations. In cases where the capital gain is significantly lower than the sale consideration, the non-resident must wait to file the tax return for that year to be eligible to obtain a refund of the tax withheld by the buyer.
In a recent case, we assisted a GGI member firm to assess whether their client (an international soccer coach) has become a tax resident in India or not, and the detailed tax implication on his global incomes if he was classified as a tax resident. The discussions also revolved around tax credit mechanisms available to him through the DTAAs between India and source countries.
In several other cases, we have assisted non-residents to obtain the certificate from tax authorities determining their capital gains tax liability on sale of real estate and several HNI tax residents with disclosure of their foreign assets.
Ashishkumar BairagraGGI member firm
M L BHUWANIA AND CO LLP, Chartered Accountants
Advisory, Auditing and Accounting, Corporate Finance, Fiduciary and Estate Planning, Tax
T: +91 22 6117 49 49
M L BHUWANIA AND CO LLP is a firm dedicated to offering professional services by employing the industry’s brightest minds. They offer collaborative audit, consulting, financial advisory, risk management, and tax services to clients. The firm’s diversified client profile across industries has helped it to improve its ability to advise clients on the dynamic and challenging environments in which they do business.
Ashishkumar Bairagra has been in practice and a Partner of the firm since 2001. He handles international taxation matters, internal audits, management audits, and consulting assignments. His areas of specialisation include international taxation, transfer pricing, valuation, due diligence, cross border business structuring, and business consulting. Ashishkumar is the Global Vice Chairman of GGI’s International Taxation Practice Group (ITPG)
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: Sapsiwai - stock.adobe.com