Investments by Non-Resident Indians (NRIs) in India have increased greatly post liberalisation and the softening of the repatriation norms by the Reserve Bank of India (RBI). However, a major concern still remains in respect of the taxation regime pertaining to NRIs under the Income-Tax laws in India. An NRI’s income is subject to certain hardships and controversies during taxation and is not as simple as it appears. In this article we portray some of the controversies which dampen the spirit of income inflows into India to some extent.
Double taxation avoidance agreement protects a person from the incidence of double taxation in the residence country and source country. To enjoy the benefit of avoidance of double taxation, a person must be a resident of one of the country with whom India has entered into an agreement. The term “Resident” means a person who is liable to tax therein by virtue of his domicile, citizenship, residence or any other specified criteria. It means there should be a liability for a person to pay tax in his country and if the residence country does not tax a person, then he cannot access the treaty. Countries like UAE, Qatar, Saudi Arabia etc do not tax individuals.
Various contrary decisions have been pronounced on the issue whether resident individuals of above countries can have access to double tax avoidance treaty for beneficial tax regime. Recently, the government had renegotiated the treaty with UAE and now the term “resident” includes an individual who resides in UAE for at least 183 days and can access the India-UAE double tax avoidance treaty. Such are welcome clarifications and we are of the view that such amendments should be made in other treaties were individuals are not liable to tax.
Business income vs capital gain
Many NRIs are showing interest in the Indian stock market, which is one of the progressive signs for the nation. But recently issues created on tax treatment on surplus earned on sale of shares have created chaos amongst NRIs. The draft circular issued by the Central Board of Direct Taxes (CBDT) covers a wide range to treat gains arising form the sale of shares as capital gain vs business income. The criteria is not new but is a result of the past rulings of various courts. Based on this, the scrutiny of assessment of cases has increased significantly for NRIs, which creates the discomfort. To end the uncertainty, CBDT should provide clear guidelines for the NRI community on treatment of gains arising out of the sale of shares as capital gains or business income.
FBT on ESOP to NRIs
India is known for specialisation in information technology. It has started competing with companies like Accenture, IBM etc at the global level. As the sector grows, many Indian are deputed on assignments at offshore locations for a long duration. Employee Stock Option is considered as the preferred option to retain talent.
Recently, the Finance Minister had brought the stock option granted to employees under the Fringe Benefit Tax (FBT) regime. He has now clarified that for determining the value of FBT, the fair market value will be calculated as on the date of vesting of option i.e date on which the options granted vests with the employee and FBT will be payable by the employer at the time of exercise of option by employee. The employer has the option to pass the burden of FBT to the employee. There are various open issues that still remain to be clarified: (i) If an NRI (overseas personnel) working abroad has been deputed to India by a foreign company for a short period of time and during such period he exercises the option which was vested to him abroad, can the foreign company be brought under the purview of FBT? (ii) An employee deputed in an overseas country would be required to pay tax in the overseas country on the basis of grant, vesting or exercise if that country levies a tax on them. If the employer in India has paid FBT and recovered it from the employee, then the employee may not be able to claim credit (of the amount paid to the employer towards FBT) in the overseas country, which leads to double taxation.
To further boost investment by NRIs in various sectors the law should be amended.