Gifts to Non-Residents

IN times of crisis, India used to look to its non-resident Indians to come to its rescue. Even at the time of the opening up of the economy, the tax concessions were first given to non-resident Indians (NRI) and it is thus that we have a chapter XII-A which contains special provisions relating to certain incomes of non-residents. Over the years with the opening of the economy, investments from other non-residents, particularly the foreign institutional investors became more important and currently, there are very few special benefits that are exclusively available to NRIs.

The current budget on the other hand contains a few proposals that may indirectly affect the NRIs adversely. The first one relates to gits made to a person outside India. To appreciate the changes, it is necessary to look at the history of the relevant provision.

The abolition of gift tax in 1998 led to resourceful taxpayers showing gits from unrelated parties often from secrecy jurisdictions. Back then it was difficult for tax administration in India to pursue these cases. Of course, gifts were also shown from domestic donors but they were at least within the reach of the tax administration for questioning and cross examination. Therefore, to counter the phenomenon, through an amendment in 2004 unrelated gifts purported to have been received from non-relatives (above INR 25,000) were now treated as income of the recipients. Initially only individuals and HUF were covered. The income was to be taxed under the head- 'income from other sources'. In due course, the remit of the section has been expanded and now covers all persons.

With the liberalisation of remittance from India, things took a different turn. Apparently, now, the table is turned and Indian residents are making gifts to persons outside India. The recipients of such largesse could be reliable proxies or distant relatives. Obviously, such amounts cannot be said to accrue or arise in India. Therefore, the Finance Bill has now inserted a provision in section 9, 9(1)(viii) to the following effect to deem income accrual in India:

"(viii) income of the nature referred to in sub-clause (xviia) of clause (24) of section 2, arising from any sum of money paid, or any property situate in India transferred, on or after the 5th day of July, 2019 by a person resident in India to a person outside India.". (The way it has been drafted, it is not very clear as to whether the reference is to gifts from India or income arising from such gifts.)

Note that the provision is not restricted to non-resident Indians alone but applies to all non-residents. There have been cases of high profile Indians renouncing Indian citizenship and settling abroad. One suspects that the provision may have something to do with such cases.

If the gifts are to relatives as mentioned in section 56, then of course the provision will not apply. The definition of 'relative' for the purpose of section 56 is rather restricted. So distant relatives will come under the newly inserted provision. The Memorandum explaining the budget adds: "In a treaty situation, the relevant article of applicable DTAA shall continue to apply for such gifts as well."

In the treaty context, OECD/UN Model Article 21 deals with 'other income'. Under OECD Model, the right of taxation of income not dealt with in other distributive articles is exclusively with the country of residence. Under the UN Model, while giving the right of tax to the residence country, the source country is also given the right to tax such income.

Now assuming that an Indian resident makes a gift above INR 50000 to a distant relative who is an NRI, resident of the USA, India will deem the gifted amount as income from other sources of the non-resident in India. Here, it is income from other sources under Indian law. In the India-US tax treaty Article 23 deals with income from other sources and states as follows:

1. Subject to the provisions of paragraph 2, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State

2. (…)

3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention and arising in the other Contracting State may also be taxed in that other State.

Thus, if the income is from other sources, then India indeed has a right to tax the same. But, there are other treaties where such right does not exist. In those cases, the provision will be useless. Besides, there is no consensus about the nature of income that can be taxed under this head in terms of tax treaties. Of course, in non-treaty situations, there should be no problem.

Black Money Act

The other area where non-resident Indians are adversely affected relates to the Black Money (Undisclosed Foreign Income and Assets) and imposition of tax Act. When the government in 2015 enacted the same, it had two components. One was to give an opportunity to the eligible persons to come clean by paying necessary penalties. The terms of the scheme were not attractive enough and it may be admitted that the scheme was not successful in bringing in any substantial black money reportedly held abroad. The scheme was restricted to Indian residents and specifically did not apply to not ordinarily residents.

The other component of the black money law was to have a tough law for resident Indians who are found to have foreign income or assets. The return forms were also suitably modified to indicate foreign asset holding of resident Indians. Cases falling under this Act could be reopened up to 16 years and there are provisions of stiff penal consequences. More importantly, the offence under the Black Money Act was made a predicate offence under the Anti Money Laundering legislation.

Now, Indian residence rules being based solely on the number days of stay in India, many of the important moneybags are perhaps non-residents for the purpose of taxation in India and can cock a snook at the Indian legislation. It is also true that we are getting a lot of information under the automatic exchange of information and other routes.

Probably because of that and the zeal of the current government to go after economic offenders who have scooted from India, almost five years after the original legislation, there is now a retrospective amendment in the Black Money Act to amend the provision of Sec 2(2) thereof so as to include within the meaning of "assessee", the person who was resident in India either in the previous year to which the income referred to in section 4 relates, or in the previous year in which the undisclosed asset located outside India was acquired. And importantly, the term "assessee 'would cover all categories of taxpayers - resident, not ordinarily resident and also non-resident. So, even if one was NRI when the secreted income was earned in India, one would be caught by this provision and necessary consequences under the Black money Act as also the PMLA Act will follow. (It seems that amendments in some other sections of the Black Money Act-like sections 42,43,49,50,51 etc, where there is reference to 'not ordinarily resident' have not been proposed)

Secondary adjustment

In 2017, through section 92CE, India had introduced the secondary adjustments provisions. If there is a primary transfer pricing adjustment because of a transaction between a taxpayer in India and its associated enterprise abroad, then the adjustment amount is required to be repatriated to India within a particular period, failing which the amount would be deemed to have been advanced by the taxpayer to its associated enterprise and interest charged in the prescribed manner. The detailed rules were subsequently notified by the CBDT. The provisions did not apply if the adjustment was not in excess of INR 10 million and the primary adjustment was made for any FY prior to 2016-17.

Now an amendment has been proposed to substitute the word 'or' in place of 'and' in order to make it clear that the two conditions of the section are alternate conditions. In other words, if the primary adjustment has been made for an assessment year prior to 2016-17 or if the amount of adjustment does not exceed INR 10 million, it is not necessary for the taxpayer to make the secondary adjustment. Although the amendment seems beneficial, the Memo does not explain why the amendment was necessary. Through a proviso, it has also been provided that as a result of this amendment, the taxpayer can claim no refund and through an Explanation, it has been clarified that the excess money or part thereof may be repatriated from any of the associated enterprises of the assessee which is not a resident in India.

There may be cases where the books of the related entity that has availed of the excess have been closed and it is not possible to pass any entry or repatriate the amount to India, Possibly, to take care of this concern that was expressed by some commentators, it has been provided that in a case where the excess money or part thereof has not been repatriated in time, the taxpayer will have the option to pay additional income-tax at the rate of eighteen per cent on such excess money or part thereof in addition to the existing requirement of calculation of interest till the date of payment of this additional tax. The Memorandum to the Finance Bill states that the additional tax is proposed to be increased by a surcharge of twelve per cent; that the tax so paid shall be the final payment of tax and no credit shall be allowed in respect of the amount of tax so paid. It has also been provided no deduction shall be allowed in respect of such payment under any other provision of this Act. However, if the taxpayer pays the additional income-tax, he will not be required to make secondary adjustment or compute interest from the date of payment of such tax.

Implementation of APA

India started its APA programme in the year 2012. The relevant legal provisions are contained in sections 92CC and 92CD. Normally, APAs are entered into for a number of years together not only for the coming years but may be applicable for back years also. Hence, section 92CD(3) currently provides that if the assessment has already been completed before the time allowed under the APA for filing the modified return under 92CD(1), then the AO shall 'proceed to assess or reassess or recompute the total income of the relevant assessment year having regard to and in accordance with the (APA) agreement."

The APAs are entered into at the highest level and approved by a Member CBDT. Field officers are bound to give effect to the APAs. It is not known whether while giving effect to such orders the Assessing officers were also tinkering with other issues. An amendment is now proposed in section 92CD (3) which will read as follows:

"(3) If the assessment or reassessment proceedings for an assessment year relevant to a previous year to which the agreement applies have been completed before the expiry of period allowed for furnishing of modified return under sub-section (1), the Assessing Officer shall, in a case where modified return is filed in accordance with the provisions of sub-section (1), pass an order modify the total income of the relevant assessment year determined in such assessment or reassessment, as the case may be, having regard to and in accordance with the agreement." As a result, the AO will not have any power to assess, reassess or recompute except for giving effect to the APA.

Maintenance of Books of Accounts

Section 92D provides for maintenance of prescribed books of accounts by any person who has entered into an international transaction. Consequent to the BEPS recommendations when country by country reporting became necessary, a proviso was added to the effect that a constituent of a MNC group shall also maintain prescribed books of accounts. It could perhaps be interpreted that a constituent of a group is required to maintain the books of account only when there is international transaction entered into by that constituent. The section is now completely recast and it is made clear that the constituent will maintain books of accounts whether there is any international transaction or not.

Country by country reporting

Finance Act 2016 inserted section 286 to fulfil India's obligations to submit information under the country by country reporting. It provides that every parent entity or the alternate reporting entity, resident in India, shall, for every reporting accounting year, in respect of the international group of which it is a constituent, furnish a report, to the prescribed authority within a period of twelve months from the end of the said reporting accounting year, in the form and manner as may be prescribed.

In India, the accounting year is the financial year from April to March. Many of India's important trading partner countries however follow calendar year as the accounting year. The memorandum explains that taking into account concerns that in case of an alternate reporting entity (ARE) resident in India whose ultimate parent entity is not resident in India, the accounting year would always be the accounting year applicable in the country where such ultimate parent entity is resident and cannot be the previous year of the entity resident in India, it has been proposed to suitably amend section 286 so as to provide that the accounting year in case of the ARE of an international group, the parent entity of which is not resident in India, the reporting accounting year shall be the one applicable to such parent entity.

Default in deducting tax at source in the case of non-residents.

Failure to deduct tax at source entails disallowance of the expenditure itself under section 40(a)(i). Initially, the disallowance was only in case of payments to non-residents. Subsequently, in 2004, a similar provision was also introduced (40(a)(ia)) in case of payments without deduction of tax at source to residents also.

A failure to deduct tax at source has consequences for the deductor in other ways also and the deductor may be declared an assessee in default and recovery proceedings may be started. Through an amendment in 2012, it was however provided that in the case of non-deduction of tax at source before payment to a resident, if the resident has declared the income and paid the tax thereon then, the deductor will not be considered as being in default. Consequently, there would be no disallowance under section 40(a)(ia) also. Similar relaxation was not there in the case of payments to non-residents. This has now been introduced by the Finance Bill, 2019. However, in case of payment without deduction of tax at source to residents, only 30% of the sum is disallowed under section 40(a)(ia) whereas the entire sum is disallowed in case of payment to non-residents. That difference continues.

Assistance in collection of tax

In 2003, the OECD had introduced an optional Article in tax treaties for giving assistance to collection of tax at source. In India, we have a provision for recovery of tax in pursuance of agreements with foreign countries since 1972. With increase in international cooperation, this aspect has also attained importance. The existing provision was applicable only when the defaulter had properties in India or in the reciprocal case an Indian resident assessee had property outside India. The scope is now enlarged and as explained in the Memo, in order to provide assistance in recovery of tax as per treaty obligation with the other country, it is proposed to provide for tax recovery where details of property of the persons are not available but the said person is a resident in India and vice versa.

Online application for reduced or nil withholding of tax

In terms of section 195(2), a person responsible for paying any sum chargeable to tax (other than salary) may make an application to the AO to determine the appropriate portion that should be deducted at source or for nil withholding. The Memorandum explains that in order to use technology to streamline the process, which will not only reduce the time for processing of such applications, but shall also help tax administration in monitoring such payments, it has been proposed to amend this section to allow for prescribing the form and manner of application to the AO and also for the manner of determination of appropriate portion of sum chargeable to tax by the AO. The details will obviously be prescribed in the Rules.