RESIDENTIAL STATUS FOR TAX PURPOSES

In India, as in many other countries, the charge of income tax and the scope of taxable income varies with the factor of residence. There are two categories of taxable entities viz. (1) residents and (2) non-residents. Residents are further classified into two sub-categories (i) resident and ordinarily resident and (ii) resident but not ordinarily resident. The law prescribes two alternative technical tests of residence for individual taxpayers. Each of the two tests relate to the physical presence of the taxpayer in India in the course of the "previous year" which would be the twelve months from April 1 to March 31.

A person is said to be "resident" in India in any previous year if he -­

(a) is in India in that year for an aggregate period of 182 days or more; or

(b) having within the four years preceding that year been in India for a period of 365 days or more, is in India in that year for an aggregate period of 60 days or more.

The above provisions are applicable to all individuals irrespective of their nationality. However, as a special concession for Indian citizens and foreign citizens of Indian origin, the period of 60 days referred to in Clause (b) above, will be extended to 182 days in two cases: (i) where an Indian citizen leaves India in any year for employment outside India; and (ii) where an Indian citizen or a foreign citizen of Indian origin (NRI), who is outside India, comes on a visit to India.

In the above context, an individual visiting India several times during the relevant "previous year" should note that judicial authorities in India have held that both the days of entry and exit are counted while calculating the number of days stay in India, irrespective of however short the time spent in India on those two days may be.

A "non-resident" is merely defined as a person who is not a "resident" i.e. one who does not satisfy either of the two prescribed tests of residence.

An individual, who is defined as Resident in a given financial year is said to be "not ordinarily resident" in any previous year if he has been a non-resident in India 9 out of the 10 preceding previous years or he has during the 7 preceding previous years been in India for a period of, or periods amounting in all to, 729 days or less.

Till 31st March 2003, "not ordinarily resident" was defined as a person who has not been resident in India in 9 out of 10 preceding previous years or he has not during the 7 preceding previous years been in India for a period of, or periods amounting in all to, 730 days or more.

Section 6 of the Income-tax Act, 1961, prescribes the tests for determining the residential status of a person. Section 6, as amended, reads as follows:­

For the purposes of this Act,­

(1) An individual is said to be resident in India in any

 previous year, if he­

a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or

b) [* * *]

c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

Explanation.- In the case of an individual,­-

(a) being a citizen of India, who leaves India in any previous year [as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or] for the purpose of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted

(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted.

(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.

(3) A company is said to be resident in India in any previous year, if­

a. it is an Indian company; or

b. during that year, the control and management of its affairs is situated wholly in India.

(4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.

(6) A person is said to be "not ordinarily resident" in India in any previous year if such person is­

(a) an individual who has not been a non-resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has not been non-resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

DETERMINATION OF RESIDENTIAL STATUS OF AN ASSESSEE UNDER THE INCOME TAX ACT can be explained with the help of Flow Chart as follows.

An analysis of the above provisions would indicate that ­

1.To become a non-resident for income-tax purposes, an Indian citizen leaving India for the first time to take up employment abroad should be out of the country latest by 28th September and should not return to India before 1st April of the next year. However, in case of a person leaving India for taking up a business or profession, the criteria of 60 days will apply, as defined earlier.

2. An NRI individual, whose total stay in India in 4 preceding years exceeds 364 days, will not lose his non-resident status in the following year(s) if his total stay in India in that year (from April 1 to March 31) does not exceed ­

(a) 181 days, if he is on a "visit" to India; or

(b) 59 days, if he comes to India on "transfer of residence".

3. An NRI who has returned to India for settlement, whose total stay in India for 4 preceding years does not exceed 364 days will not lose his non-resident status in the following year(s) if his total stay in India in such year(s) (from April 1 to March 31) does not exceed 181 days.

4. A new-comer to India would be treated as "not ordinarily resident" for the first two years of his stay in India or if treated as Non Resident in the year of arrival then for the second and third year of his stay in India. An individual (whether Indian or foreign citizen) who has left India and remains non­resident for at least nine years preceding his return to India or whose stay in 7 years preceding the year of return has not exceeded 729 days would, upon his return, be treated as "non-resident" or "not ordinarily resident" depending upon the number of days stay in India in the year of return. The status of "not ordinarily resident" will remain effective for 2 years including or following the year of return as the case may be.

IMPORTANT POINTS TO BE BORNE IN MIND WHILE DETERMINING THE RESIDENTIAL STATUS OF AN INDIVIDUAL

(a) Residential status is always determined for the Previous Year because the assessee has to determine the total income of the Previous Year only. In other words, as the tax is on the income of a particular Previous Year, the enquiry and determination of the residence qualification must confine to the facts obtaining in that Previous Year.

(b) If a person is resident in India in a Previous Year in respect of any source of income, he shall be deemed to be resident in India in the Previous Year relevant to the Assessment Year in respect of each of his other sources of Income. [Section 6(5)]

(c) Relevant Previous Year means, the Previous Year for which residential status is to be determined

(d) It is not necessary that the stay should be for a continuous period.

(e) It is not necessary that the stay should be at one place in India.

(f) Both the day of entry and the day of departure should be treated as the day of stay in India [Petition No.7 of 1995 225 ITR 462 (AAR)]

(g) Presence in territorial waters in India would also be regarded as stay in India.

(h) A person is said to be of Indian Origin if he or either of his parents or any of his grand parents was born in undivided India [Section 115C]

(i) Official tours abroad in connection with employment in India shall not be regarded as employment outside India.

(j) A person may be resident of more than one country for any Previous Year.

(k) Citizenship of a country and residential status of that country are two separate concepts. A person may be an Indian national/Citizen but may not be a resident in India and vice versa.

POINTS TO BE CONSIDERED BY NRIs

• Previous Year is period of 12 months from 1st April to 31st March. Number of days stay in India is to be counted during this period.

• Both the Day of Arrival into India and the Day of Departure from India are counted as the days of stay in India (i.e. 2 days stay in India).

• Dates stamped on Passport are normally considered as proof of dates of departure from and arrival in India.

• It is advisable to keep several photocopies of the relevant passport pages for present and future use.

• Ensure that date stamped on the passport is legible.

• Keep track of no. of days in India from year to year and check the same before making the next trip to India. It is advisable to maintain a chart for the number of days stay in the current and in the preceding seven (7) previous years.

• In the 1st year of leaving India for employment outside India, ensure that you leave before 29th September. Otherwise total income of the financial year (including the foreign income) will be taxable in India if it exceeds the basic exemption limit.

• During the last year of stay abroad, on transfer of residence to India, ensure to come back on or after Feb 1st (or Feb 2nd in case of a leap year). Since arrival before this date will result in stay in India exceeding 59 days. However, a person whose stay in India in preceding four (4) previous years does not exceed 365 days, he may return after September 30th of the relevant year without loss of non-resident status.

Implications of Residential Status for NRIs/PIOs

The complexities of determining the residential status for individual NRI/PIO under various statutes and regulations will be obvious from the provisions outlined above and in this context it would be important to note the following:

1. The concepts and rules for determining the residential status income-tax laws and FEMA are quite different and it would be possible to be a resident under one law and non-resident under the other.

1. For exemption of income tax in respect of NRE and FCNR deposits investor should be non-resident under FEMA.

1. The special tax rate concessions on income and long-term capital gains on specified assets, purchased in convertible foreign exchange are available to non-residents under the Income-tax Act.

CHARGEABLE INCOME

Section 5 of the Income-tax Act lays down the scope of total income of any previous year of any person. The Section reads as follows:

(1) Subject to the provisions of this Act, the total income of any previous year of a person who 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 such person ;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 of sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in. India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who 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 such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation I.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India."

Thus, it is clear from the above that the incidence of tax depends upon a person's Residential Status and also upon the place and time of accrual and receipt of income.

In tabular form, the above may be stated as under:-

As stated earlier, the charge of income tax varies with the factor of residence in the previous year and the general position with regard to the three categories of taxpayers can be summarised as follows:

1. Taxpayers in all categories are chargeable on income, from whatever source derived, which is received or is deemed to be received in India by or on behalf of them or which accrues or arises or is deemed to accrue or arise to them in India other than income specified as exempt income.

In the above context, it may be noted that the 'receipt' of income refers to the first occasion when the recipient gets the money under his own control and it is the first receipt that determines the year and place of receipt for the purposes of taxation. If the income is already received outside India, no tax liability will arise when the whole or any part of such income is remitted to India.

2. A "resident and ordinarily resident" pays tax in India on his entire world income, wherever accrued or received.

3. A "non-resident" pays tax only on his taxable Indian income and his foreign income (earned and received outside India) is totally exempt from Indian taxes.

4. A "not ordinarily resident" pays tax on taxable Indian income and on foreign income derived from a business controlled in or a profession set up in India.

5. An individual upon acquiring the status of "not ordinarily resident" would not pay tax, for a period of two years, on the interest on :

(a) the continued Foreign Currency Non-Resident (FCNR) account;

(b) the Resident Foreign Currency (RFC) account; and

(c) on income earned from foreign sources unless such income is directly received in India or is earned from a business controlled in or a profession set up in India.

SPECIAL PROVISIONS RELATING TO CERTAIN INCOME OF NRIs

Some of the special tax concessions for NRIs/PIO investing in India were introduced in the Finance Act, 1983, which became effective on June 1, 1983. The tax provisions were further liberalised by subsequent Finance Acts and other amending laws.

Special concessions ­

Investment income from 'foreign exchange assets' comprising shares and debenture of and deposits with Indian companies and central government securities, subscribed to or purchased in convertible foreign exchange, is charged to income tax at a flat rate of 20%. No deductions are, however, allowed and tax is levied on gross income. The basic exemption, below which income is not taxed in India, is also not allowed.

Under these special concessions a reduced rate of 10% is applied to the long-term capital gains on transfer of any foreign exchange asset held by the NRI/PIO. In order to qualify for long-term capital gains, the minimum holding period for shares held in a company or any other security listed in a recognised Stock Exchange in India or units of Unit Trust of India or of a specified Mutual Fund is 12 months and for other assets it is 36 months. Long-term capital gains on foreign exchange assets are, however, exempted from tax if the net proceeds realized on transfer are re-invested, within six months of such transfer, in any specified securities and the new assets are retained for at least three years.

The Finance Act, 2003 has withdrawn the taxing provision in respect of dividend received by the shareholders on shares held in Indian companies. Accordingly, dividend received by the shareholders of Indian companies will be exempt from tax. The income received from units of Unit Trust of India and of specified mutual funds will also be exempt.

Finance Act 2004 has:

(a) granted tax exemption as regards long term capital gains arising from transfer of equity shares in a company and/or units of equity oriented schemes of Mutual Funds, which are subject to securities transaction tax; and

(b) fixed at 10% the tax on short-term capital gains arising from such shares and! or units.

The tax concessions in respect of investment income (and not long term capital gain) will continue to apply even after the NRI/PIO returns to India but such exemption would be available only in respect of foreign exchange assets other than shares in Indian companies and the exemption will continue until such time as the assets are transferred or converted into money. However, as dividend is exempt income from 1st April 2003, exclusion of shares from said provision is redundant.

In the circumstances where the income of NRI/PIO from such foreign exchange assets is below the taxable limit or the average level of tax is below 20%, he may elect not to be governed by the special tax concessions referred to above. He would then have to furnish a Return of Income in the normal course together with a declaration of such election and he would be entitled to claim a refund of the whole or a part of the tax deducted at source, as may be appropriate.

As mentioned above, short-term capital gains arising from transfer of equity shares and/or units of equity-oriented schemes of Mutual Funds, which are subject to securities transaction tax, are taxed at 10%. Other Short-term capital gain is taxable at normal slab rates as applicable to residents, and the return of income has to be filed by the NRI/PIO making such gain.

Capital gain from transfer of shares or debentures of Indian companies will be computed by converting the cost of acquisition, expenses incurred in connection with such transfer and the sale price of the capital asset into the same foreign currency as was initially used in the purchase of these assets and the capital gain so computed in such foreign currency will be reconverted into Indian currency. This computation effectively gives the NRI/PIO the benefit of claiming exchange loss, if any, on all capital gains arising from sale of shares or debentures of Indian companies, whether these are long term or short term. It may be noted that the aforesaid benefit is available only if the investment is made from convertible foreign exchange. In respect of investment made from funds other than convertible foreign exchange, and if the asset is a long-term capital asset benefit of indexation can be availed. However, indexation is not available in respect of debentures.

TAX EXEMPTIONS FROM INCOME TAX

Income from the following investments made by NRIs/PIO out of convertible fore exchange is totally exempt from tax.

(a) Deposits in under mentioned bank accounts ­:

(i) Non Resident External Rupee Account (NRE)

(ii) Foreign Currency Non-resident Account (FCNR)

(b) Units of Unit Trust of India and specified mutual funds, other specific securities, bonds and savings certificates (subject to conditions prescribed limits under the Income-tax laws and regulations).

(c) Dividend declared by Indian company.

(d) Long term capital gains arising from transfer of equity shares in a company and/or equity oriented schemes of Mutual Funds, which are subject to securities transaction tax.

It should be noted that the tax exemptions relating to NRE bank deposits will cease immediately upon the NRI/PIO becoming a resident in India whereas the interest on FCNR bank deposits will continue to be tax free as long as the NRI maintains the status of Resident but Not Ordinarily Resident or until maturity, whichever is earlier.

TAX EXEMPTIONS FROM WEALTH TAX

Where an NRI/PIO returns to India for permanent residence, moneys and the value of assets brought by him into India and the value of assets acquired by him out of such moneys within one year immediately preceding the date of his return and at any time thereafter are totally exempt from Wealth-tax for a period of seven years after return to India.

The above exemption may not have much relevance now since the Finance Act 1992 has considerably reduced the scope of Wealth-tax. With effect from 1st April, 1993, Wealth-tax is being levied only on non-productive assets like urban land, buildings (except one house property), jewellery, bullion and vehicles, cash over Rs.50,000/- etc. The current rate of Wealth-tax is 1 % on the aggregate market value of chargeable assets as on 31st March every year in excess of Rs.1.5 million.

However, it may be noted that NRIs are also liable to pay wealth tax if the market value of taxable assets as on 31st March exceeds Rs.l.5 million.

TAX EXEMPTIONS FROM GIFT TAX

Gift Tax Act, 1958 has been repealed with effect from 1st October, 1998 and as such, Gift Tax is not chargeable on any gifts made on or after that date.

With regard to gifts of foreign exchange or specified assets made by NRIs to their relatives in India, it should be noted that ­

1. Gifts made by an NRI/PIO to his or her spouse, minor children or son's wife will involve clubbing of income and wealth in the hands of the donor-NRI/ PIO.
2. In the case of gifts to minor children the clubbing of income, as above, will cease upon such children attaining the age of 18 years.
3. The clubbing provisions will apply, in case of gift to spouse or son's wife in India, only to the' first-stage of income from the original gift. Second-stage income arising from investment of the income from the original gift is not clubbed and this will constitute the separate wealth/income of the donee spouse.

Generally, the income of minor children, from any source (including income from gifts from parents) is clubbed with the income of the parent whose total chargeable income is greater.

Other matters to be noted regarding gifts are

1. All gifts received by residents from NRIs/PIO may be subject to the tax authorities requiring the recipient to provide evidence as regards the identity and financial capacity of the donor and genuineness of the gift.
2. Under the Foreign Exchange Management Act, 1999 no approval from Reserve Bank of India (RBI) is necessary for the resident donee to hold gifted immovable property outside India provided the said property is gifted by a person resident outside India. General permission, subject to certain conditions, is granted by RBI for the resident donees to hold foreign moveable properties such as shares and securities gifted by NRI/PIO donors.
3. The Income Tax Act has now provided that any sum of money exceeding Rs.25,000 received without consideration (i.e., gift) by an individual from any person on or after 1st September, 2004, the whole of such sum will be chargeable to income-tax in the assessment of recipient (i.e., donee) under that head "Income from other sources" for and from assessment year 2005-06 and onwards.

However, the above provisions will not apply to any sum of money /gift received­:

(a) from any relative; or

(b) on the occasion of the marriage of the individual; or

(c) under a will or by way of inheritance; or

(d) in contemplation of death of the payer.

The term "relative" is defined as:

(1) spouse of the individual;

(2) brother or sister of the individual;

(3) brother or sister of the spouse of the individual;

(4) brother or sister of either of the parents of the individual;

(5) any lineal ascendant or descendant of the individual;

(6) any lineal ascendant or descendant of the spouse of the individual; and

(7) spouse of the person referred to in (2) to (6).

Scope of Receipts

• As per plain reading of the provision, any receipt without consideration, save exclusions, whether capital or otherwise, may be considered as income.

• Similar receipts by any person (such as, a partnership firm, a company, and AOP etc.), other than an individual or a Hindu undivided Family, would not constitute income in its hands.

• The provision would apply to an individual irrespective of his residential status. Accordingly, any receipt in India by a non-resident of the nature discussed above would be considered as income in his hands.

• Gifts on occasion other than marriage, for example, birthday, marriage anniversary and other social occasions, religious ceremonies etc., would be taxable as income. Gifts received on the occasion of the marriage of the individual, irrespective of any limit, (but within reasonable limits) would not constitute income.

• The receipts should be in the form of money. Accordingly, any gift in kind would not be taxable.

• The receipts must be without consideration, implying in the nature of gift.

PRESUMPTIVE TAX PROVISIONS

Certain provisions have been incorporated in the Income-tax Act whereby the total income of certain non-resident assessee is computed on the basis of certain percentage of their gross total receipts. This estimated income approach is expected to reduce areas of uncertainty and resultant tax litigation. However, a non-resident assessee has the option to maintain books of account and get his books of account audited u/s 44AB ("Tax Audit") and offer lower profits and gains for taxation in India than the profits and gains estimated under Sections 44BB and 44BBB on presumptive basis.

Special provisions applicable to non-residents for computing their income under the head "Business Income"

Shipping Business (Sections 44B & 172)

Section 44B contains special provisions for computing profits and gains of shipping business of a non-resident assessee. In the case of non­residents, such profits and gains will be taken at an amount equal to 7.5% (seven and a half per cent of the amount paid or payable to the non-resident or to any other person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any Indian port as also of the amount received or deemed to be received in India on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.

Section 172, which is a complete code in itself, contains provisions for taxation of occasional shipping business of non-residents in respect of profits made by them from carriage of passengers, livestock, mail or goods shipped at a port in India.

Business of Providing Services and Facilities in Connection with Exploration etc. of Mineral Oils (Section 44BB)

Section 44BB contains special provisions for computation of taxable income of a non-resident assessee engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire, used or to be used, in the prospecting for, or extraction or production of, mineral oils. It provides that 10% of the amount paid or payable to, or the amount received or receivable by, the assessee for provision of such services or facilities or supply of plant and machinery, shall be deemed to be the taxable income of such non-resident assessee.

Business of Operation of Aircraft (Section 44BBA)

Section 44BBA contains special provisions for computing profits and gains of the business of operation of aircraft of non-residents. It provides for determination of the income of non-resident taxpayers on presumptive basis at a flat rate of 5% of the amount received or receivable for carriage of persons, livestock, mail or goods from any place in India or the amount received or deemed to be received within India on account of such carriage from any place outside India.

Profits and Gains of Foreign Companies Engaged in the Business of Civil Construction or Erection of Plant And Machinery or Testing or Commissioning thereof, in Connection with certain Turnkey Power Projects (Section 44BBB)

Section 44BBB provides that, notwithstanding anything to the contrary contained in Sections 28 to 44AA of the Income-tax Act, the income of foreign companies who are engaged in the business of civil construction or erection or testing or commissioning of plant or machinery in connection with a turnkey power project shall be deemed at 10 per cent of the amount paid or payable to such assessee or to any person on his behalf, whether in or out of India. For this purpose, the turnkey power project should be approved by the Central Government. It has also been clarified that erection of plant or machinery or testing or commissioning thereof will include lying of transmission lines and systems.

Taxation of Non-Resident's Royalty Income or Fees for Technical Services (Section 44DA)

Royalties and fees for Technical Services received from the Government or an Indian concern by a Non-Resident or a foreign company in pursuance of an agreement entered into after 31-3-2003 shall be computed under the head "Business Income" in accordance with the provisions of the Income Tax Act i.e. after allowing deduction for various permissible expenses and allowances. 

Section 44DA does not permit deduction of following expenses

(i) expenditure which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India, and

(ii) amounts reimbursed by permanent establishment to its head office or to any of its other offices (Other than, reimbursement of actual expenses).

Restriction on Deduction of Head Office Expenses (SECTION 44C)

Section 44C is intended to be made applicable only in the cases of those non-residents who carry on business in India through their branches.

The deduction in respect of head office expenses will be limited to:

a) An amount equal to 5 per cent of the "adjusted total income" for the relevant year: or

b) The actual amount of head office expenditure attributable to the business in India, whichever is least.

TAX INCENTIVES FOR INDUSTRIES

Tax holidays in the form of deductions are available for private sectors and incentives to industries located in special area/regions are listed below:

Deduction of 100% of the profits from business for a period of 10 years for:

a. Development or operation and maintenance of ports, airports, roads, highways, bridges, rail systems, inland water ways, inland ports, water supply projects, water treatment systems, irrigation projects, sanitation and sewage projects, and solid waste management systems.

b. Generation and distribution of power that commence before 31.3.2006.

c. Development, operation and maintenance of Industrial Park or Special Economic Zone.

Capital Gains on Infrastructure Funds

Income by way of dividend, interest or long-term capital gain of an infrastructure capital company or an infrastructure capital fund is 100% tax-exempt. Income of venture capital company or venture capital fund set up to raise funds for investment in venture capital undertaking is also tax exempt.

Tax Exemptions

Following tax exemptions are available in different sectors:

Deduction of 100% of the profit from business of

(a) Development or operation and maintenance of ports, airports, roads, highways, bridges etc.

(b) Generation, distribution and transmission of power

(c) Development, operation and maintenance of an Industrial Park or SEZ

(d) By undertakings set up in certain notified areas or in certain thrust sector industries in the North Eastern states and Sikkim

(e) By undertakings set up in certain notified areas or in certain thrust sector industries in Uttaranchal and Himachal Pradesh

(f) Derived from export of articles or software by undertakings in FTZ, EHTP/STP

(g) Derived from export of articles or software by undertakings in SEZ

(h) Derived from export of articles or software by 100% EOU

(i) An offshore banking unit situated in SEZ from business activities with units located in the SEZ

(j) Derived by undertakings engaged in the business of developing and building housing projects.

(k) Derived by an undertaking engaged in the integrated business of handling, storage and transportation of food grains

(l) Derived by an undertaking engaged in the commercial production or refining of mineral oil

(m) Derived by an undertaking from export of wood based handicraft

AUTHORITY FOR ADVANCE RULINGS

With a view to avoid a dispute in respect of assessment of Income Tax liability in the case of a non-resident (and also specified categories of residents), a scheme of Advance ruling was incorporated in the Income Tax Act. The Authority for Advance Ruling(AAR) pronounces rulings on the applications of the non-resident/residents submitted and such rulings are binding both on the applicant and the Income Tax Department. Thus the applicant can avoid expensive and time-consuming litigation, which would have arisen from normal income tax proceedings. The application in such cases should be addressed to

The Commissioner of Income Tax Authority of Advance Ruling

5^th Floor, NDMC Building
Yashwant Place,
Satya Marg,
Chankaya Puri,
New Delhi-110021

The Finance Act 1993 has introduced, with effect from 1st June 1993, a new scheme of providing advance rulings on tax matters.

The relevant provisions of this scheme, in the Income-tax Act, are as under:

1."advance ruling" means

(i) a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant; or

(ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction, which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident, and such determination shall include the determination of any question of law or of fact specified in the application.

2.The Authority for Advance Rulings, located in Delhi, shall consist of the following Members, appointed by the Central Government:

(a) A retired Judge of the Supreme Court as Chairman.

(b) An officer of the Indian Revenue Service who is qualified to be member of the Central Board of Direct Taxes.

(c) An officer of the Indian Legal Service who is, or is qualified to be Additional Secretary to the Government of India.

3. The application, for obtaining an advance ruling, has to be made in the prescribed form in quadruplicate accompanied by the prescribed fee and can be withdrawn within 30 days from the date of the application.

4. The Authority may, after examining the application and the records called for either allow or reject the application. Provided that the application will not be allowed by the Authority where the question raised:

(a) is already pending in the applicant's case before any income­ tax authority, the Appellate Tribunal or any Court;

(b) involves determination of fair market value of any property;

(c) relates to a transaction or issue, which is designed prima facie for avoidance of income tax.

5. No application can be rejected without giving an opportunity to the applicant of being heard, either in person or through a duly authorized representative. Also, where the application is rejected, reasons for such rejection have to be stated in the order made by the Authority.

6. The advance ruling shall be pronounced by the Authority in writing with in. six months of receipt of the application and a copy thereof, duly signed by the Members and certified in the prescribed manner, shall be sent to the applicant and to the Commissioner of Income-tax having jurisdiction over the case.

7. The advance ruling will be binding on the applicant as well as on the concerned income tax authorities, only in respect of the specific transaction in relation to which the ruling is sought. The ruling will remain binding unless there is change in law or facts on the basis of which the ruling has been given.

8. Once the subject matter of the application is rejected or decided against the applicant, there is no provision for appeal. However, in the matter involving gross mistakes/mis-application, the applicant may either file a writ petition to the High Court or a Special Leave Petition with the Supreme Court of India

9. The Authority is empowered to declare the advance ruling void, on ground of fraud or misrepresentation of facts by the applicant.

While it must be remembered that the advance ruling has no direct general applicability and is binding only in the case of the particular applicant, it may have considerable value as a persuasive precedent for other concerned individuals.

DOUBLE TAX AVOIDANCE AGREEMENT (DTAA)

The Government of India has entered into double taxation avoidance agreements (tax treaties) with several countries with the principal objective of evolving a system for the respective countries to allocate the right to tax different types of income on an equitable basis. Tax treaties serve the purpose of providing full protection to taxp­ayers against double taxation and also aim at preventing discrimination between the taxpayers in the international field. The NRIs/PIO would, therefore, be well advised to take advantage of such treaties in tax planning for their investments in India.

DTAA can be defined as an "international agreement between two sovereign States reaching an understanding as to how their residents will be taxed in respect of cross order transactions in order to avoid double taxation on the same income".

In yet another way, DTAA can be defined as "an agreement of compromise between two contracting States whereby each country agrees to give up something in consideration of the other country giving up something in its favour".

It may sometime happen that owing to reduction in tax rates under the domestic law-taking place after coming into existence of the treaty, the domestic rates become more favorable to the NRIs/PIO. Since the object of the tax treaties is to benefit the NRIs/PIO, they have, under such circumstances, the option to be assessed either as per the provisions of the treaty or the domestic law of the land.

In order to avoid any demand or refund consequent to assessment and to facilitate the process of assessment, the concerned authorities in India have provided that tax shall be deducted at source out of payments to NRIs/PIO at the prevailing rates at which the particular income is made taxable under the tax treaties.